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upper limit or threshold of these fiscal instruments that a government can incur
(deficits and debts) without destabilizing the economy, or going to bankruptcy
(default). The idea is based on the notion that, like individual, a government
cannot incur debt indefinitely to cater to its public spending. How much debt or
deficit is too much? To answer this question, the concept of fiscal space has
become popular since the early 2000s.
Due to the recent crises in Greece and some highly indebted countries like
Italy, Japan, and Cyprus, the concept of fiscal space has gained more and more
attention among business people, economists, and politicians. The problem is
how to measure the fiscal space. Many definitions are given, and so far as we
know, they are too abstract or too complicated to be applied to practical policy
formation.
The problem is basically empirical. In this paper we compare the ratios of the
government deficit to GDP (Section 2), of the public debt to GDP (Section 3), and
of countries and regions of the world. We then define the fiscal space of a country
narrowly as the difference between the country's ratios and the average or the
median of the world ratios. We also give some practical interpretation of the
fiscal space of the 30 countries calculated by Moody's (Section 4). Similarly, we
evaluate the upper limit of government credibility numerically by using its median
or average of the world (Section 5). Lastly, we explore some uses of the fiscal
space recommended by the World Bank (Section 6).
2. International Comparison of Government Budget
In addition to national debt, when we discuss the fiscal policy we also have
to know the solvability of the government budget, espciatlly its relation to GDP.
Like personal finance, idealy the government budget should be balanced every
year. However, this is almost impossible as the economy is exposed to a cyclical
trend of the world economy. During the depression, the government budget
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Taiwan Economic Forum
Volume 14, Number 4
