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Debt affordability

Debt affordability analysis seeks to verify the extent to which a given country can support all its debt burdens in its budget. The indicators used to measure debt affordability are the weight of public debt interest on total revenues and the debt-to-GDP ratio.


Debt burdens

Debt burdens include interest, commissions and other charges related to debt service.


Debt cancellation

Debt cancellation is the partial or total forgiveness of debt contracted by the General Government. In general, it results from a bilateral agreement between a creditor and a debtor to partially or fully cancel or forgive a liability (debt), which the debtor incurred towards the creditor.


Debt service

Debt service corresponds to the totality of interest payments and capital repayments that an entity has to make in a given period. The higher the debt service, the greater the risk of default.


Debt Sustainability Analysis (DSA)

Debt Sustainability Analysis (DSA) consists of a set of methodologies that allow for the evaluation of liquidity and solvency conditions of sovereign debt. It depends on the hypotheses assumed, resulting in some degree of uncertainty, but it allows for synthetic conclusions.


Debt sustainability safeguard

The “debt sustainability safeguard” under the European economic governance framework reform imposes restrictions on the reference trajectory to ensure that the projected general government debt-to-GDP ratio decreases by a minimum annual average amount of: (a) 1 percentage point of GDP as long as the general government debt-to-GDP ratio exceeds 90 %; (b) 0,5 percentage points of GDP as long as the general government debt-to-GDP ratio remains between 60 % and 90 %. Such average decrease shall be computed from the year before the start of the reference trajectory or the year in which the excessive deficit procedure is projected to be abrogated, whichever occurs later, until the end of the adjustment period. 


Deferred tax assets

Deferred tax assets correspond to the amount of corporate income tax recoverable in the future that derives from the carry-forward of tax losses, deductible temporary differences or unused tax credits.


Deferred tax liabilities

Deferred tax liabilities correspond to the amount of income tax that shall be paid in the future that derives from deductible temporary differences.


Deficit resilience safeguard

The “deficit resilience safeguard” under the European economic governance framework reform imposes restrictions on the reference trajectory to ensure that fiscal adjustment continues, where needed, until the Member State concerned reaches a deficit level that provides a common resilience margin in structural terms of 1,5 % of GDP relative to the deficit reference value of 3 % of GDP. To achieve the required margin the annual improvement in the structural primary balance to shall be 0,4 percentage points of GDP, which shall be reduced to 0,25 percentage points of GDP in the case of an extension of the adjustment period. 


Deflator

A deflator is a price index that expresses the changes in prices of a given variable over a time interval, for a product or a basket of products, and is used to  remove the effect of price changes on the value variations (called the nominal variations or in current prices), for the same period, thus eliminating the effect of price changes and leaving only the changes in volume (also called real change). A deflator compares a reference period with a base period, and can be expressed as an index or as a percentage change. A value that has been adjusted using a deflator is called deflated. An example is the GDP deflator and that of its individual components.


Direct taxes

Direct taxes are those directly applicable to the income (labour, capital) of taxpayers assessed for a specific tax period.


Discretionary fiscal policy

Discretionary fiscal policy reflects deliberate changes in the conduct of fiscal policy (as distinct from the operation of automatic stabilizers). Decreases in revenue and/or increases in expenditure are referred to as fiscal impulse and the reverse as fiscal consolidation.

 

This component can be measured through the change in the structural primary balance, although with limitations, as this indicator can be influenced by other factors. An alternative is to consider only the budgetary impact of legislative changes (e.g. European System of Central Banks methodology and European Commission methodology), despite the limitations in its measurement.


Discretionary measures

Discretionary measures can be defined as deliberate changes in the implementation of fiscal policy. 


Draft Budgetary Plan

The Draft Budgetary Plan is a document that must be sent to the European institutions by October 15, which presents the main aspects of the budgetary situation of the General Government and its sub-sectors for the coming year, based on a national budget proposal. This document describes the budgetary targets, the detailed measures to achieve these targets, and the macroeconomic assumptions underlying the budget. A Draft Budget Plan is not the same as a Draft State Budget.


Due interest

Due interest is interest related to a terminated accounting period. Interest accrued between the most recent coupon payment date and the sale date of a bond. At the time of the transaction, the buyer pays the price of the bond plus accrued interest, which is calculated by multiplying the net daily interest on the loan by the number of days that have passed since the last interest payment.


Dynamic effect

The dynamic effect corresponds to the annual change in the public debt ratio explained by the product between i) the difference between the implicit interest rate (r) and nominal GDP growth (γ) and ii) the debt ratio in the previous period [i.e. is the second term of the equation below]. In global terms, the annual variation in the debt-to-GDP ratio depends on the annual primary deficit, the stock-flow adjustment and the relationship between the implicit interest rate and economic growth, expressed as a percentage of GDP, i.e. :

Where ∆d is the variation in the debt ratio, t is the year, p corresponds to the primary deficit, r the implicit nominal interest rate on the debt, γ the nominal GDP growth rate and aj the stock-flow adjustment. In the absence of stock-flow adjustments, when the interest rate (r) is higher (lower) than the nominal growth of output (γ), the variation in the debt-to-output ratio is higher (lower) than the budget deficit ratio. Thus, the greater this differential, the greater the growth in the public debt ratio (corresponding to the dynamic effect) and vice versa.

This effect can be decomposed into interest effect and growth effect. The growth effect corresponds to the annual variation in the debt ratio explained by the evolution of output (in the denominator).

 

 

The interest effect corresponds to the annual variation in the debt ratio explained by the evolution of interest paid on public debt. The implicit interest rate is the average implicit rate of interest paid on all debt.