Public debt in several advanced economies is now at its highest level outside wartime, and debt in emerging markets has risen steadily over the past decade. As interest rates are no longer at historical lows (as they were after the global financial crisis of 2008), concerns about fiscal sustainability are growing.
The question of how to restore sustainability is not new. Policymakers and academics have spent decades debating the policies and institutions needed to support fiscal discipline and debt reduction. Many countries adopted numerical fiscal rules. Others strengthened checks and balances on governments, among other things through the creation of independent fiscal councils.
“Fiscal policy is, ultimately, a creation of policy. Decisions on spending and taxes reflect social preferences, economic constraints, distributive conflicts and electoral incentives.”
But outcomes have been decidedly uneven: despite some successes, there have been many more failures. This should not be surprising, since fiscal policy is, ultimately, a creation of policy. Decisions on spending and taxes reflect social preferences, economic constraints, distributive conflicts and electoral incentives. Fiscal sustainability consists in reconciling these pressures so that debt follows a sustainable path. With this in mind, there is no easy solution.
However, well-designed fiscal frameworks can tilt policy choices toward financial discipline, even when other pressures push in the opposite direction. Research and experience have shown that better design makes a real difference in two realms: the assessment of debt sustainability and the crafting of fiscal rules that endure beyond the political cycle.
While the standard framework for assessing debt sustainability enjoys broad acceptance, there is a gap when it comes to capturing the feedback loop from fiscal policy decisions to macroeconomic outcomes that reinforce sustainability. For example, consolidation can reduce debt ratios, but only if implemented at the right time and in the right way; otherwise, it can weaken growth to the point of harming sustainability.
“Cutting public investment or spending on education or research in pursuit of short-term consolidation can dampen growth”
Moreover, treating all spending the same way can be counterproductive: cutting public investment or spending on education or research in pursuit of short-term consolidation can dampen growth and raise debt ratios in the medium term. It is also not correct to assume that any expenditure will automatically be offset by higher growth. What is needed is more guidance on which types of spending have the greatest effects on sustainability and under what conditions. To that end, more models — beyond what current frameworks offer — are required on the relationship between fiscal decisions and sustainability.
There is also a need for much greater clarity about fiscal rules, which have become the standard instrument of fiscal governance in large parts of the world. While evidence shows that they, on average, improve fiscal outcomes, their effectiveness is uneven and their durability depends heavily on the circumstances of their adoption.
Rules introduced under market pressure during periods of economic strain often yield only short-term improvements. Once the immediate pressure subsides, so too does the political commitment to enforce them. Fiscal rules adopted when governments are compelled to reach a consensus, as opposed to when majority governments simply impose a framework, are more durable. After all, credibility cannot be legislated. The time to build solid fiscal frameworks is before a crisis occurs, not after it is already too late.
Ultimately, the underlying challenge remains the same. The analysis of debt sustainability rests on technical judgments — from growth prospects to the performance of different types of spending — that are genuinely difficult to make. And governments have incentives to rely on optimistic forecasts or selective accounting to shape these judgments in a favorable light. Likewise, the credibility of fiscal rules depends not only on consistent application, but also on sustainability assessments that are rigorous enough to inspire confidence and sufficiently resilient to withstand post hoc revisions.
Both areas require technically solid research free from political pressures. This underscores the importance of independent fiscal councils, transparent budgeting processes and robust technical institutions. Governments, of course, make all fiscal decisions, but these technocratic actors raise the quality of those decisions, challenge unrealistic assumptions, clarify trade-offs and ground the rules in analysis that inspires greater confidence.
Fiscal discipline, after all, requires more than a framework. It requires public institutions with the technical capacity and the resources to carry out rigorous and honest research. A lack of analytical rigor and integrity leads to poor fiscal decisions and ephemeral fiscal rules.
© Project Syndicate, 2026.
In collaboration with the “la Caixa” Foundation
