Public Debt Sustainability Analysis Of Emerging Countries And Experiences For China

Recent years have witnessed an increasing scale of government debt, along with larger and larger risk, one of which is sustainability of public debt. Based on inter-temporal budget constraint model under general equilibrium and panel data of 29 emerging economies from 2000 to 2014, the paper adds lagged ratio of primary surplus to GDP into the model, which makes it a dynamic panel data model. Then two-step system generalized method of moments is applied to test the condition of inter-temporal budget constraint. We find that there is phenomenon of fiscal fatigue among emerging economies, and economic growth and volatility of fiscal expenditure have a negative effect on lagged ratio of primary surplus to GDP, but volatility of GDP positive. The paper tries to explain why. Then we calculate the maximum debt ratio and make debt sustainability analysis in terms of choosing the minimum among the maximum. The conclusions are following as these. Firstly, the maximum debt ratio can reach to a relatively high level among emerging economies, which means total sustainability among these countries. Secondly, some differences of the maximum debt ratio exist among emerging economies, but the greater differences of space of debt sustainability exist. Thirdly, debt ratio in a few emerging economies is more than the maximum, making it unsustainable.Working on fiscal reaction function and the maximum debt ratio, the paper does stress testing on China’s government debt. It’s been made three scenes, including change of economic growth rate, volatility of GDP and fiscal expenditure. We find that decreasing of average rate of interest will bring about a climbing maximum debt ratio, decreasing of economic growth rate will result in a declining maximum debt ratio, and positive reducing of volatility of GDP will lead to a dropping maximum debt ratio but negative is the opposite, and positive increasing of volatility of fiscal expenditure will generate a descending maximum debt ratio but negative is on the contrary. In a word, there is sustainability on China’s public debt, and the result of stress testing tends to be active, but risk influencing on China’s debt exists. Finally, the essay puts up with some suggestions for China according to practices of emerging countries and conclusions of this paper.