Of the other major industrial nations, Germany and France are considered high risk, while Britain Russia, Canada and USA are rated medium risk. A fiscal risk index by the London-based Maplecroft analysts rates Germany 21 after the Maldives, France 48 after Jamaica, Britain 63 after the Philippines, Russia 78 after Costa Rica, Canada 100 after Denmark and USA 135 after Ethiopia.

The index measures a country's fiscal sustainability by projecting changes in child and old-age dependency ratios (non-working dependants) between 2005 and 2050 and by analysing current income, development levels, the structure of public finances and the extent of public spending on pensions, health and education.

FISCAL SUSTAINABILITY

Generally speaking, government or public income and expenditure influence fiscal sustainability. Sources of government income may be taxes, borrowing (debt), national insurance contributions, charging for services, and selling off state-owned assets

Government expenditure includes spending on public and merit goods -- goods which will not be provided or underprovided in a free-market economy. These encompass health, education, police and defence. Much of government expenditure in developed countries is directed towards social security systems.

Fiscal policy and sustainability are important, because they may have a large impact on the economy, due to their effects on aggregate demand, and because perceptions regarding the sustainability of fiscal policy can affect financial markets. Macroeconomic and financial stability may therefore be directly impacted.

The countries most at risk from challenges to their sustainability (those ranked in the index near the bottom of the ranking, with scores close to 0) are advanced industrial as well as high income developing countries. For the most part, they are at an advanced stage in the demographic transition towards low fertility and high life expectancy and increasingly ageing populations. The have high public spending on social security, especially health and pensions, face substantial fiscal deficits and large public debts

Countries at the top of the ranking (with scores close to 10) -- mostly resource-rich countries of sub-Saharan Africa -- are not as far advanced in the demographic transition and still have comparatively high fertility rates and low life expectancy, notes the new study. They mostly run fiscal surpluses or moderate fiscal deficits, coupled with lower public debts. This group includes very poor as well as fairly wealthy countries. All of them, however, spend very little on public pension systems and comparatively little on health.

GOVERNMENT

Researchers point out that government is the primary guardian of fiscal sustainability -- it needs to manage its income and expenditure accordingly. "In this, fiscal policy is closely linked with monetary policy and macroeconomic stability as a whole. There is, however, no single ‘correct’ fiscal policy, only that which is appropriate for the country’s circumstances -- and even in this case, there will likely be disputes over tax rates and the cost and structure of social security systems," says Maplecroft analyst Fiona Place.

The discussion about a 'single correct fiscal policy' is part of the wider issue of the role of the state, that is, the extent to which it should be involved in economic activity.

Most countries in Europe have a long tradition of a ‘welfare state’, with comparatively high taxation and extensive social security systems.

The USA, by contrast, has long had a fairly minimalist state, with lower taxation and lower levels of social spending. Many governments in developing countries have different challenges entirely -- their tax base may simply not be wide enough to provide social security, thus not leaving them much of a choice.

"Ideally, government should derive enough income from taxation and other sources to be able to efficiently and sustainably run the services it and the electorate have chosen to provide," the study suggests.