Assessing Fiscal Sustainability in Iran

Fiscal policy is said to be sustainable if the present value of future primary surpluses equals the current level of debt. In this paper we empirically examine the sustainability of public finances in Iran, during the period 1991-2011. Our analysis is based on Hamilton and Flavin (1986) and Martin (2000) criterion. There are four estimation approaches for testing fiscal sustainability in long-run: Engle & Granger, Johanson-Joselious, Dynamic Ordinary Least Squares (Dols) and Fully–modified Ordinary Least Sqaure (FMOLS). Also, we use sustainability indicator, primary deficit gap index, which are related to the intertemporal budget constraint in short run. Results, notably, show that fiscal sustainability is weak in long-run. Furthermore, assessing fiscal sustainability indicators in each year excluding oil revenues indicates that, fiscal policies have been unsustainable. On the other hand, despite considering oil revenue as part of government revenue resources, fiscal policy is sustainable only between 2003 and 2011.