Theoretical Foundations, Properties and Interpretation of Fiscal Gap Indicator

Abstract

Government finances sustainability analysis normally relies on quantitative indicators assessing probability of budget crisis occurrence. In this paper a class of such indicators (fiscal gap indicators) is considered. Fiscal gap evaluates long term budget imbalances and corresponding methodology of fiscal sustainability assessment is based upon comparing present value of expected budget expenditures and current government debt on the one side, and present value of expected budget revenues on the other side. Theoretical foundations of fiscal gap indicator as a measure of fiscal sustainability, its properties and interpretation are given in the paper. An illustrative example based on calculations for Russian budget is also provided.