Dr. Robert Sweeney:

One of the criticisms of debt sustainability analysis is that if it encourages fiscal consolidation in a trading partner, this can have implications for other countries as well. That is not taken into account.

There are two components to debt sustainability analysis in general. There is what is called a deterministic projection, which tries to project debt trajectory under certain scenarios, such as shocks to growth, interest rates and so on, and what is called the stochastic analysis, which looks at the various probabilities that might go in certain ways, increasing or reducing over five years, and considers many different scenarios. One thing that comes to mind in the context of debt is that it is always gross debt to GDP that is being talked about. However, if a country starts engaging in public investment - typically this involves a government acquiring an asset - there is a genuine argument that such investment puts a government in a better fiscal position compared with, say, current expenditure. This is most obvious if we think of a government buying a financial asset, or an asset that is liquid, because while that type of expenditure increases its gross debt, that government has a liquid asset in exchange for that, which it can sell quite easily if it needs to reduce its debt. One of the reasons the current rules might be tempered when governments engage in public investment is such investment results in the acquisition of an asset.

On investment that might reduce our emissions but that will not necessarily increase our outputs, and the Senator used flood defences as an example, my feeling is that much of the public investment member states will need to undertake in order to meet their emissions targets will be of that sort. If the investment yielded very high increases in output or was potentially very profitable, typically, the private sector would be doing it already. That is the case, and the example the Senator gave is a very clear instance of it. Probably most of the public investment we will need for climate or other types of spending will be of that sort. There is a very real danger that we will underinvest both because of the constraints and because particular types of investment will not necessarily have a pay-off in the next few years or generate significant amounts of output. I agree with the Senator's points. I am not sure if I answered her questions.