An Assessment of Fiscal Rules and Sustainability Using an Overlapping Generations Approach: An Application to Belgium

Building on the work of among others Diamond (1965), a two-period overlapping generations model including income taxation, pension benefits, and public investment is set forth in order to assess Belgium’s fiscal sustainability. Moreover, the model is employed to get a better grasp of the effects of possible fiscal rules, which are among others thought to prevent a deficit bias. In particular, the model is employed to calibrate the effects of maintaining current fiscal policy, a balanced primary budget, and adhering to the golden rule of public finance. It is found that the Belgian conditions will not lead to a sustainable equilibrium under the conditions of the proposed model due to crowding out in the capital market. Furthermore, the assessed fiscal rules are preferred to the current policy even if the initial Belgian debt would be relatively low.”