Italy is in better shape than Germany? Not by the measures now used for big decisions.
But Laurence Kotlikoff says there is a better measure; it’s already being calculated, but not being used in the EU’s main measures. He says Europe should use the infinite-horizon fiscal gap instead of debt versus GDP.
Making Sense at PBS
… Now the Germans will be stuck. For the only way to properly measure a country’s fiscal status is via its infinite-horizon fiscal gap. And on a fiscal gap measure, Italy is in far better shape than Germany.
A country’s fiscal gap is the present value of all its projected future expenditure commitments net of all its projected future tax receipts. Whether the expenditure commitments are called one thing or another doesn’t matter to the fiscal gap. All commitments are put on the books.
Economists have been slow to realize that the official debt and its annual change – the deficit — measures fiscal language, not fiscal policy. But the profession is now clear on the point.
Fiscal gaps are measured as the share of GDP needed to be raised each year in additional taxes to permit the government to meet all its expenditure commitments through time, including those labeled “debt service.” The most recent measurement of EU fiscal gaps was done in 2012 for 24 member states by the European Commission. The results are shown in Table 3.5 of the European Commission’s Fiscal Sustainability Report 2012.
Luxembourg, with its 9.7 percent of GDP fiscal gap, is in the worst shape of the included EU countries. The next biggest fiscal profligate is Belgium with a 7.4 percent gap. The Netherland’s 5.9 percent gap, the UK’s 5.2 percent gap, Finland’s 5.1 percent gap, and Spain’s 4.8 percent fiscal gap are also quite large. France and Germany, on the other hand, are close to fiscal balance with fiscal gaps of 1.6 percent and 1.2 percent, respectively.
As for Italy, its fiscal gap of negative 2.3 percent is the lowest of any of the 24 included countries.
This is shown in table 3.5 and graph 3.4 about page 42 of European Commission Financial Sustainability Report 2012 (PDF)
Kotlikoff also points out that many prominent economists have called on the US to use infinite-horizon fiscal gap accounting, The Inform Act