Measuring Public Debt Sustainability

Public debt sustainability is a multidimensional process. Egypt aims to maintain a sustainable general path in conducting its fiscal policy. However, the rising path of accumulated debt implies critical restrictions on fiscal stance and fiscal space. The study examines the mechanisms and conditions under which public debt is sustained in Egypt. Moreover, the study examines the structural endogenous long-term response of the Egyptian government towards its accumulated public debt. In addition to examining the fiscal fatigue hypothesis when debt jumps to high extreme levels. The research adopts Bohn’s approach to estimates a fiscal reaction function. The Autoregressive Distributed Lag ARDL technique is applied for the period from 1981 to 2021. Three critical specified case regressions are estimated. The first model measures the general simple fiscal reaction function linking the primary balance to public debt. The second model examines the response of the structural long-term primary balance to public debt providing a general judgement whether fiscal policy in Egypt is expansionary, neutral, or restrictive. Finally, a non-linear estimation is implemented to assess the possibility of fiscal fatigue. Findings of the first regression consider public debt sustained. However, the second regression indicates that the government is unable to adjust its structural primary balance positively with the increasing public debt. Thus, fiscal policy in Egypt tends to be restrictive. Furthermore, the fiscal fatigue hypothesis applies as the magnitude of government fiscal response is conditioned by the level of accumulated public debt. At low levels of debt, the government response is not structurally planned, showing weak response. When public goes high, government undertakes serious measures and positively adjusts its primary balance with the increased public debt. However, when public debt jumps to extreme elevated levels, the government is unable to maintain a positive response indicating the possibility of fiscal fatigue and fiscal default. Therefore, the study emphasizes the necessity of planned serious fiscal actions to correct the long-term response. Cyclical automatic response should be revised. Moreover, Non-interest expenditures should be structurally adjusted to maintain the required level of government reasonable