This chapter explores the link between sovereign debt and financial sustainability in central governments, clarifying sustainability mechanisms specific to the public sector. They refer to the connection between public debt and the monetary basis, as well as the general interest missions performed by the public sector to cover collective and long-term obligations and guarantees. By examining matters raised to this specificity, we offer an original position on the financial sustainability of central governments.
In recent decades, there has been a trend toward convergence between the private and the public modes of accounting and finance, including related financial sustainability criteria. Financial sustainability of central governments was then allegedly aligned with that of business firms. Our approach argues that some financial mechanisms that lie at the heart of sustainability of public entities are specific and pertain to the public sector sphere. To illustrate this specificity, three issues are especially addressed: (i) the taxing power; (ii) the public debt management and its refinancing mechanism, and (iii) the collective engagement represented by pay-as-you-go pension obligations. A theoretical framework is then developed and corroborated by numerical illustration and case studies in practice and regulation. One case study concerns the sustainability measures adopted under “the Excessive Debt Procedure Criteria” by the European Union (EU), which may show inconsistency between management by financial indicators and sovereign sustainability.
Some received questions will be renewed, such as: are sustainability and funding linked? Shall governments fully repay their debt one day? Central government is deemed to be financially sustainable when it can pursue its ongoing public benefit missions while fulfilling its financial obligations when they become due in time and amount. This financial capacity depends on both tax revenues and public debt management. In this context, governmental debt capacity consists in placing sovereign debt for sake of debt issuance and refinancing – with governmental entities, resident and foreign debt-holding investors, monetary financial institutions and central banking. The latter two placements relate to the monetary base management. Financial markets may facilitate some of these ongoing transactions on sovereign debt. Therefore, fiscal policies, welfare policies and public debt management are linked, while governmental debt capacity constitutes an integral part of its financial sustainability.