Geert Langenus

Fiscal Sustainability and Policy Implications for the Euro Area

In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EUs Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the governments primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses.

A Disaggregated Framework for the Analysis of Structural Developments in Public Finances

In this paper, we present a disaggregated framework for the analysis of past and projected structural developments in the most relevant revenue and expenditure categories and the fiscal balance. The framework, in particular, distinguishes between the effects of discretionary fiscal policy and of macroeconomic and other developments and is sufficiently standardised to be used in multi-country studies. Here, it is applied to Belgium, Finland, Germany, Italy, the Netherlands and Portugal over the period 1998 to 2004. During this period the structural primary balance ratio clearly worsened in all countries except Finland. In Belgium, Italy and the Netherlands, both revenue and expenditure contributed to the deterioration of the structural primary balance. In Germany the large deterioration in revenue was partially offset by the decline in the structural primary expenditure ratio, while the opposite was true for Portugal. The analysis highlights the various factors that contributed to these developments.

Fiscal Sustainability Indicators and Policy Design in the Face of Ageing

Mainly due to increasing concerns about the potential impact of population ageing the sustainability of public finances has become one of the key issues in fiscal assessments. This paper briefly reviews the different theoretical benchmarks and empirical tests for sustainability and assesses the sustainability of public finances in euro area countries on the basis of the latest projections of the Ageing Working Group of the EU Economic Policy Committee. Two alternative operational indicators for fiscal sustainability are proposed and appropriate policy options to restore fiscal sustainability are explored for three individual euro area countries. Pre-funding strategies that create the budgetary room that is needed to finance ageing costs in advance require important consolidation efforts for most euro area countries and can imply aiming at significant budgetary surpluses in the coming years for some. However, a simplified technical exercise assessing the evolution of the fiscal burden of the average worker shows that such strategies generally imply a more even distribution of the fiscal burden across generations than more gradual adjustment strategies.

Fiscal sustainability and policy implications: a post-crisis analysis for the euro area

In this paper, we examine the sustainability of euro area public finances against the backdrop of population ageing after the 2008–2009 recession. We argue that ageing costs may be higher than projected by the Working Group on Ageing Populations (AWG) of the EUs Economic Policy Committee, consider alternative indicators to quantify sustainability gaps for euro area countries and assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon lifetime contributions to the governments primary balance of different generations suggests that an important pre-funding of ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate manner to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised Stability and Growth Pact would ideally need to be revised upwards to obtain significant surpluses.