Fiscal Sustainability with Non-Renewable Resources

Abstract

"March 1998." This paper seeks to answer the question "what constitutes sustainable fiscal policy in an economy where wealth is derived predominantly from a non-renewable resource?" In particular, the focus is on oil-producing countries. This issue requires an examination of fiscal policies in an explicitly dynamic framework because the current fiscal stance imposes constraints on future fiscal policies. For example, an oil producers fiscal position, as typically measured by the ratio of overall deficit to GDP, can look quite sustainable either fortuitously, because of a temporary rise in the oil price or, if unconstrained by OPEC quotas, because of a deliberate increase in production. However, higher production has consequences beyond the current period since it speeds the depletion of the resource which in turn places greater constraints on future fiscal decisions. In such an economy, conventional fiscal indicators can be deceptive in describing the sustainability of the underlying fiscal position, particularly in the face of volatile world commodity prices.