Walking the fiscal tightrope: a framework for fiscal sustainability in government

From the government debt crisis in Europe to the fiscal cliff in the US, governments around the world continue to struggle to achieve fiscal sustainability and control their finances in a post-GFC world.

 

To achieve greater insight and understanding of the impacts of government debt and fiscal policy on the global economy, KPMG International examined the fiscal policy settings of 19* countries within the G20 group of countries across the budgetary, economic and intergenerational cycles. Based on the key findings, the report proposes the essential characteristics and attributes of a competent fiscal sustainability framework for the public sector.

According to the research:

• Counter to popular opinion, the roots of the current government debt crisis do not lie solely in the GFC. In fact, there are numerous factors that have led to today’s issues with fiscal sustainability. In particular, a key issue is the persistent lack of fiscal discipline and an inability to achieve fiscal policy targets, the result of short-termism and political expediency.
• The challenges now facing government finance in many of the world’s leading economies will likely not be solved in the short term. Most governments, if not all, will now also have to deal with the longer term impacts created by intergenerational aging and global economic interconnectedness.
• The solution is clear: better frameworks—and an improved commitment to adhere to them long term

Ultimately, the fiscal sustainability of government finances for both developed and developing countries depends on how governments manage the combination of:• global economic shifts• existing government debt levels • slow world economic growth prospects• impacts of intergenerational change upon government finances.
Governments need to demonstrate a greater commitment and capacity to control their own finances and to live within their means. It is not about the size of government spending, or the extent of social welfare or the level of entitlement spending that a nation’s citizenry wishes to embrace. It’s about the affordability of that embrace.If restraint and sound fiscal management cannot be extracted from the existing political and economic institutions of a nation, then there may be a need to design further mechanisms that separate a nation’s fiscal policy settings and long-term fiscal responsibility obligations from the political process. Such a pathway may become necessary for no other reason than to ensure that short-termism and political expediency do not unduly impact a nation’s fiscal legacy.

For full report please go to :
http://www.kpmg.com/global/en/issuesandinsights/articlespublications/government-fiscal-sustainability/pages/default.aspx?utm_medium=email&utm_campaign=2013-com-davos&utm_source=external&utm_content=fiscal