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 at the heart of the sustainability of public entities are specific and pertain to the public sector sphere.
To illustrate this specificity, three issues will especially be addressed: (i) taxing-power; (ii) public debt management and its refinancing mechanism, and (iii) collective engagement represented by pay-as-you-go pension obligations. A theoretical framework will be developed, corroborated by numerical illustration and case studies in practice and regulation. Some received questions will be revisited, 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 are due in time and amount. This financial capacity depends on both tax revenues and public debt management. In this context, governmental debt capacity consists of placing sovereign debt - for the 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 transactions on sovereign debt. Therefore, fiscal policies, welfare policies and public debt management are linked, while governmental debt capacity constitutes an integral part of financial sustainability.
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.