The Furman-Summers fiscal sustainability metric: a note on the case of Brazil by Edmar Bacha (12/2020).
“Furman and Summers (2020)2 propose to substitute the ratio of real interest payments to GDP for the debt to GDP ratio as a metric to measure fiscal sustainability. Their point is that what matters for fiscal sustainability is debt cost not debt volume.
Instead of d = D/Y, they suggest using v = r.d to evaluate fiscal sustainability, where r is the real interest rate, D is debt and Y, GDP. Indeed, the well-know formula for (small) changes (∆) in the debt to GDP ratio is:
∆d = r.d – g.d + m
where g is the growth rate of GDP and m is the primary deficit ratio to GDP. As made clear by the first term in the right-hand side, what matters to maintain the debt ratio growth under control is debt cost, r.d.Actually, what really matters is excess debt cost, (r-g).d, but this note does not deal with the behavior of g…”
