Design Choices for Debt Sustainability

The report examines the limitations of rigid debt rules in emerging markets and developing economies (EMDEs), proposing a transition to a 'constrained discretion regime'. It argues that current rules-based approaches often lead to complexity and unenforceability, particularly when multiple fiscal rules are layered incrementally. The authors recommend replacing rigid ceilings with flexible 'debt anchors' embedded in a broader institutional framework featuring independent fiscal councils, transparent disclosure rules, and a clear distinction between long-term sustainability goals and short-term budgetary instruments.

• Current rules-based fiscal approaches in emerging markets and developing economies (EMDEs) are often ineffective due to excessive rigidity, complexity, and a lack of adaptability to shocks.
• There is an 'impossibility principle' where governments cannot simultaneously enforce budget balance rules and debt rules due to the uncertainty of future growth and interest rates.
• The report identifies three main types of debt rules based on flexibility: debt ceilings (most rigid), debt anchors (medium-term trajectories), and debt standards (qualitative prescriptions).
• Fiscal adjustments intended to stabilize debt can create negative feedback loops, where short-term output reductions hinder growth and potentially worsen debt repayment conditions, leading to 'fiscal fatigue'.
• The authors propose a 'constrained discretion regime' consisting of three building blocks: clearly stated long-term sustainability goals, required fiscal strategies and principles, and independent assessment by an authority such as a fiscal council.
• For most EMDEs, the most effective solution is a debt anchor combined with an institutional framework that prioritizes transparency and accountability over strict enforcement.

APA

Horas, Y., Morra, F., & Wiedenbrüg, A. (2025). Design Choices for Debt Sustainability. International Institute for Sustainable Development. https://www.iisd.org/system/files/2025-06/design-choices-debt-sustainability.pdf

Chicago

Horas, Yanne, Fernando Morra, and Anahí Wiedenbrüg. Design Choices for Debt Sustainability. International Institute for Sustainable Development, 2025. https://www.iisd.org/system/files/2025-06/design-choices-debt-sustainability.pdf.

Wikipedia

{{cite report |last1=Horas |first1=Yanne |last2=Morra |first2=Fernando |last3=Wiedenbrüg |first3=Anahí |title=Design Choices for Debt Sustainability |publisher=International Institute for Sustainable Development |date=June 2025 |url=https://www.iisd.org/system/files/2025-06/design-choices-debt-sustainability.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{horas2025design, author = {Horas, Yanne and Morra, Fernando and Wiedenbrüg, Anahí}, title = {{Design Choices for Debt Sustainability}}, institution = {International Institute for Sustainable Development}, year = {2025}, month = jun, url = {https://www.iisd.org/system/files/2025-06/design-choices-debt-sustainability.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }