The political economy of debt sustainability analysis

Client/Funding Institution

Dezernat Zukunft

Abstract

The project includes research on two papers: The first paper on "Impact of Assumptions on Ageing Costs in European Commission's Debt Sustainability Analysis (DSA)" examines the European Commission's Debt Sustainability Analysis (DSA), which forecasts public debt ratios over a 10-year period. It is based on the assumptions of the Output Gaps and Ageing Populations Working Groups. While the Output Gaps assumptions have been reviewed, the Ageing Populations assumptions, which are crucial for projecting expenditures such as pensions and health care, remain largely unexplored. The study assesses the accuracy of ageing cost assumptions in the DSAs and their implications for EU fiscal rules. The second paper on "Influence of Debt Sustainability Analyses (DSA) on Financial Markets and the Economy": looks at the impact of debt sustainability analysis (DSA) on financial markets and the macroeconomy, arguing that economic models such as DSA shape reality. Despite their complexity, institutions often use simplified DSA frameworks to inform decision-making. DSAs establish a link between debt sustainability and policy adjustments, primarily based on the ratio of public debt to GDP. In Europe, DSAs influence financial markets by predicting interest rates, potentially leading to self-fulfilling prophecies on debt issues. The study examines DSAs carried out in the euro area and advanced countries between 2000 and 2022 to analyse their impact on financial markets and the wider economy.

Duration

May 2024 - September 2024

wiiw team Leader

Philipp Heimberger

wiiw Staff

Philipp Heimberger, Magdalena Höllhuber

Publications

Keywords: Debt Sustainability Analysis (DSA), costs of ageing, ageing populations, GDP, Penison, Healthcare, EU fiscal rules, Financial markets, Interest rate, Advanced countries

Countries covered: EU

Research Areas: Macroeconomic Analysis and Policy

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