A panel data analysis of the fiscal sustainability of G-7 countries

We analyze the sustainability of fiscal policy in a panel framework for the G-7 countries in the 1980–2015 years. Panel unit root tests show that government expenditures, revenues, debt and primary deficit are non-stationary. However, a clear cointegrating relationship is found between government debt and primary deficit. Therefore, these countries should pay attention to the equilibrium between expenditure and revenues, as possible source of fiscal insolvency. Finally, a bi-directional causality flow emerges both between government revenues and expenditures as well as between government primary deficit and debt. Thus, the decisions governing expenditures and taxes are jointly made in G-7 countries.