sustainable public finances in a turbulent eu economy

DG ECFIN

Sustainable public finances in Sustainable public finances in

a turbulent EU economya turbulent EU economy

Lucio PENCHLucio PENCHHead of Unit, Head of Unit, Fiscal policies in the euro area and the EU Fiscal policies in the euro area and the EU , ,

European Commission, DG ECFINEuropean Commission, DG ECFIN

Federal Planning Bureau«Potential Growth and Fiscal Challenges», Brussels

27 October 2009

DG ECFIN

L. Pench, Head of Unit, Fiscal policies in the euro area and EUL. Pench, Head of Unit, Fiscal policies in the euro area and EUEuropean Commission, Economic and European Commission, Economic and Financial AffairsFinancial Affairs

2

OutlineOutline

I.I. Direct costs of the crisisDirect costs of the crisis

II.II. Indirect effects on growthIndirect effects on growth

III.III. Long term sustainability and ageingLong term sustainability and ageing

IV.IV. Consolidation and policy responses to Consolidation and policy responses to ensure sustainabilityensure sustainability

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The public finance situation in the EUThe public finance situation in the EUA looser fiscal stanceA looser fiscal stance

2320

11

2

5

81110

-3

-2

-1

0

1

2

3

2003 2004 2005 2006 2007 2008 2009 2010

% o

f G

DP

-25

-20

-15

-10

-5

0

5

10

15

20

25

Output gap (lhs)

CAPB EU-27 (lhs)

Number of Member States with a deficit above 3% of GDP (rhs)

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Types of fiscal costs from financial crises

Fiscal costs Economic costs = foregone output grow th

Purchase of troubled assets

Recapitalisation

Pay-out to depositors

Shortfalls from guarantees

Other

− Asset sales, asset returns and other recovery payments

Direct net costs

Revenue effect from elasticity and composition changes

Expenditure effect from drop in output (automatic stablisers)

Fiscal stimulus effect (from discretionary revenue and expenditure measures)

Market efffects (e.g., via interest and exchange rates)

Default on liquidity loans

Indirect costs 1/= automatic stabilisers and measures

addressed tow ard the non-financial sector

Direct gross costs= measures addressed tow ard the

f inancial sector

Notes: 1/ Measured in percent of GDP.

Fiscal costs of the financial crisisFiscal costs of the financial crisis

Direct fiscal costs and total fiscal costs

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0

10

20

30

40

50

60

Indonesia

(1997)

Arg

entin

a (

1980)

Jam

aic

a (

1996)

Thaila

nd (

1997)

Chile

(1981)

Turk

ey (

2000)

Kore

a (

1997)

Isra

el (

1977)

Cote

d'Iv

oire (

1988)

Dom

inic

an R

ep. (2

003)

Ecuador

(1998)

Uru

guay (

2002)

Mexic

o (

1994)

Mala

ysia

(1997)

Venezuela

(1994)

Slo

venia

(1992)

Bulg

aria (1

996)

Japan (

1997)

2/

Nic

ara

gua (

2000)

Bra

zil

(1994)

Philippin

es (

1997)

Para

guay (

1995)

Fin

land (

1991)

Hungary

(1991)

Vie

tnam

(1997)

Arg

entin

a (

2001)

Cro

atia

(1988)

Czech R

ep. (1

996)

Colu

mbia

(1998)

Arg

entin

a (

1989)

Boliv

ia (1

994)

Ghana (

1982)

Russia

(1998)

Spain

(1977)

Colu

mbia

(1982)

Unite

d S

tate

s (

1988)

Sw

eden (

1991)

Pola

nd (

1992)

Lith

uania

(1995)

Latv

ia (

1995)

Norw

ay (

1991)

Turk

ey (

1982)

Arg

entin

a (

1995)

Esto

nia

(1992)

Rom

ania

(1990)

Bra

zil

(1990)

Ukra

ine (

1988)

(% of GDP) Recovery

Net cost

Notes: 1/ Gross fiscal costs are government outlays during the crisis. Recovery values are for the period t to t+5, where t is the first year of the crisis. No data on recovery values are available for Spain, Hungary, Israel, Poland, Romania, Slovenia and Turkey (1982). For the US net fiscal costs are from Spilimbergo et al. (2008).2/ For Japan, revised Laeeven and Valencia data on gross fiscal costs are 14% of GDP while they were previously estimated at 24% of GDP (e.g., Caprio et al. 2005). Spilimbergo et al. (2008) put the gross costs at only 9.1% of GDP of which 4.7% of GDP were recovered until 2008 (in contrast to the shorter recovery period assumed (until 2002) in the Laeven and Valencia database).Source: Data from Laeven and Valencia (2008).

I. Fiscal costs of financial crisesI. Fiscal costs of financial crises

Direct Fiscal costs of past crises

Past rescues of the banking sector have often been expensive

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EU public interventions in the banking sector (in % GDP)EU public interventions in the banking sector (in % GDP)

Capital Capital injectionsinjections

Guarantees on Guarantees on bank liabilitiesbank liabilities

Relief of Relief of impaired impaired assetsassets

Liquidity and Liquidity and bank funding bank funding

supportsupport

TotalTotal

ApproveApprovedd

EffectiveEffective ApproveApprovedd




EffectiveEffective

Total EUTotal EU 2.72.7 1.71.7 24.624.6 7.87.8 0.90.9 0.80.8 3.23.2 2.32.3 31.131.1 12.512.5

Total euro areaTotal euro area 2.72.7 1.71.7 20.520.5 7.87.8 1.11.1 1.01.0 1.01.0 0.40.4 25.225.2 10.910.9

25.Some selected countries25.Some selected countries

AustriaAustria 5.55.5 1.71.7 25.725.7 6.86.8 5.55.5 0.40.4 1.61.6 1.61.6 38.338.3 10.610.6

BelgiumBelgium 5.35.3 6.16.1 70.870.8 16.316.3 8.18.1 8.128.12 N/AN/A N/RN/R 84.284.2 30.630.6

DenmarkDenmark 6.16.1 2.42.4 253.0253.0 2.52.5 0.00.0 0.00.0 0.30.3 0.30.3 259.4259.4 5.25.2

FranceFrance 1.21.2 1.21.2 16.616.6 5.55.5 0.20.2 0.20.2 0.00.0 0.00.0 18.118.1 6.96.9

GermanyGermany 4.44.4 2.02.0 18.618.6 7.27.2 1.41.4 1.41.4 0.00.0 0.00.0 24.424.4 10.610.6

IrelandIreland 6.66.6 6.56.5 164.7164.7 164.7164.7 0.00.0 0.00.0 0.00.0 0.00.0 171.3171.3 171.2171.2

ItalyItaly 1.31.3 0.10.1 N/AN/A 0.00.0 0.00.0 0.00.0 0.00.0 0.00.0 1.31.3 0.10.1

The The NetherlandsNetherlands

6.46.4 6.86.8 34.334.3 7.77.7 3.93.9 3.93.9 7.57.5 1.61.6 52.052.0 20.020.0

SwedenSweden 1.61.6 0.20.2 48.548.5 11.011.0 0.00.0 0.00.0 12.612.6 0.00.0 62.762.7 11.211.2

United United KingdomKingdom

3.53.5 2.62.6 21.721.7 11.311.3 0.00.0 0.00.0 16.416.4 14.714.7 41.641.6 28.528.5

Notes: N/A: not available indicates that the amount is not available in the state aid decisionNotes: N/A: not available indicates that the amount is not available in the state aid decision

N/R: not reported indicated that the amount was not reported by the Member States in its reply to the EFC N/R: not reported indicated that the amount was not reported by the Member States in its reply to the EFC questionnairequestionnaire

Source: Source: Commission servicesCommission services

Fiscal costs of financial the crisisFiscal costs of financial the crisis

Support to the banking system has focused on guarantees and liquidity measures

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Upper bound estimate of 13% of GDP is in line with average past direct fiscal crises costs (13% of GDP).

In individual Member States the direct fiscal costs risk to be much higher than this average.

Crisis is costly for the taxpayer.

Policies need to ensure that crises costs are contained and long-term sustainability maintained.

Fiscal costs of the financial crisisFiscal costs of the financial crisisEstimates of direct fiscal costs in the current crisis Estimates of direct fiscal costs in the current crisis (net of recovery rates)

Based on effective measures

Based on approved measures

A Recapitalisation A.1 As of 21 October 2009 1.7% 2.7% A.1.1 Loss rate (80%) 1.4% 2.2% A.2 Assuming a doubling of recapitalisation needs 3.4% 5.4% A.2.1 Loss rate (80%) 2.7% 4.3%

B Liquidity and bank funding support 2.3% 3.2% B.1 Loss rate (10%) 0.2% 0.3% B.2 Loss rate (30%) 0.7% 1.0%

CGovt. guarantees on bank liabilities and relief of impaired assets 1/

8.6% 25.5%

C.1 Loss rate (15%) 1.3% 3.8% C.2 Loss rate (30%) 2.6% 7.7%

TOTAL net fiscal costs Lower bound (=A.1.1+B.1+C.1) 2.9% 6.3% Higher bound (=A.2.1+B.2+C.2) 6.0% 12.9%

Notes: 1/ In percent of 2009 GDP (European Commission Spring Forecast 2009). Includes blanket guarantees (AT, ES, IE, NL) but not the potential shortfalls of deposit insurance schemes nor government guarantees where amounts have not been specified (e.g. BG, IT, PL, UK). Source: Commission services.

(% of GDP)

Risk scenarios for direct fiscal costs 2/

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EERP: 1.8% of GDP discretionary stimulus measures in addition to large automatic stabiliser effects.

Fiscal costs of the financial crisisFiscal costs of the financial crisisReal economy support

Discretionary fiscal stimulus measures in the EU (2009-10) 1/

0.6

0.8

0.5

0.3

0.1

0.30.3

0.5

0.4

0.7

1.1

0.0

0.3

0.50.5

1.1

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2009 2010 2009 2010 2009 2010 2009 2010

Total Revenue Expenditure Public investment

EU-27

Euro area

Notes: 1/Figures for 2010 include permanent measures taking effect in 2009 plus measures taking effect in 2010. Source: European Commission

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Government balances in 2007-10 in the Commission Services’ Spring 2009 Forecasts

-16

-13

-10

-7

-4

-1

2

5

FI DK LU SE BG NL CY DE AT SI BE CZ SK PT IT EE LT FR HU ES PL LV MT EL RO UK IE EA-16

EU-27

% o

f GDP

Nominal balance 2007




3% of GDP threshold

Fiscal costs of the financial crisisFiscal costs of the financial crisisAutomatic stabilisers and discretionary policies lead to large deficits

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10

0%

20%

40%

60%

80%

100%

120%

EE LU BG RO LT DK SI SK CZ FI SE CY LV PL ES NL MT AT DE EU-27

IE PT UK HU EA-16

FR BE EL IT

2007 2010

Large deficits lead to rapid increases in debtLarge deficits lead to rapid increases in debt

Change in debt as a share of GDP – Change in debt as a share of GDP – Commission Spring 2009 Commission Spring 2009 forecastsforecasts

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Gross public debt crises episodes (% of GDP) 1/

0

10

20

30

40

50

60

70

80

90

t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7

EU-27 2/EU-15 3/Big 5 industrial country-crises 4/Big 8 emerging market-crises 5/TOTAL 6/EU27 Current donwturn 7/

0

10

20

30

40

50

60

70

80

90

t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7

Notes: 1/ Based on 49 crises episodes as presented in the 2009 Public Finance ReportUnweighted country averages. t = start of the crisis.2/ Includes crisis episodes in Czech Republic, Finland, Hungary, Latvia, Poland, Slovak Republic, Spain and Sweden. For new Member States data from 1991.3/ Includes crisis episodes in Finland, Spain and Sweden.4/ Includes crisis episodes in Finland, Norway, Sweden, Japan and Spain.5/ In principle includes Argentina (2001), Indonesia, Malaysia, Mexico (1994), Turkey (2000), Philippines and Thailand. But data for the last three are missing.6/ Excludes Nicaragua which in 2003 (t+4) received a public debt relief.7/ All EU27 countries, t = 2008Sources: Calculations based on IMF International Financial Statistics and AMECO.

Large fiscal deficits contributed to public debt-to-GDP ratios ratcheting them up by 20 points of GDP, on average. This impact has taken a long time to reverse in the past.

Total fiscal costs of past crisesThe effect of crises on debtThe effect of crises on debt

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Critical challenges for the EU are Critical challenges for the EU are to prevent reductions in potential to prevent reductions in potential growth from:growth from:

Lower or unproductive investment Lower or unproductive investment due to risk aversion, credit due to risk aversion, credit constraints or government constraints or government interventionintervention

Permanent rebalancing of internal Permanent rebalancing of internal demanddemand

Labour market hysterisisLabour market hysterisis

Past crises (e.g. SE and FI) show Past crises (e.g. SE and FI) show that policy responses matterthat policy responses matter

Different scenarios are possible Different scenarios are possible i.e. a full return to earlier path, a i.e. a full return to earlier path, a permanent loss in level terms only permanent loss in level terms only or a permanent loss on growth or a permanent loss on growth rates rates

Case No 1: Full return to earlier path

Case No 2: Permanent loss in GDP level

Case No 3: Permanent loss on growth rates

Slope = long-term potential growth

No loss in potential output level after some

time

Potential output level

Same long-term potential growth after the crisis (same slope)


Years

Permanent loss in potential output level

Lower long-term output growth after the crisis (e.g. 1.5%)(lower post-crisis slope)

Potential growth before crisis (e.g. 2%)

Years


Potential output loss increasing

overtime

Potential growth in the aftermath of the crisisPotential growth in the aftermath of the crisis

Impact of the crisis on potential growth

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The path of actual and potential output in The path of actual and potential output in previous financial crises in Japan, Sweden and previous financial crises in Japan, Sweden and FinlandFinland

JPN

300

350

400

450

500

550

600

Trill

ions

YP

Y

SWE

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8

3

Trill

ions

YP

Y

FIN

70

90

110

130

150

170

Bill

ions

YP

Y

JPN

-7

-5

-3

-1

1

3

5

7

-9 -8 -7 -6 -5 -4 -3 -2 -1 T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

YP

Y

SWE

-7

-5

-3

-1

1

3

5

7

-9 -8 -7 -6 -5 -4 -3 -2 -1 T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

YP

Y

FIN

-7

-5

-3

-1

1

3

5

7

-9 -8 -7 -6 -5 -4 -3 -2 -1 T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

YP

Y

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Hypothetical GDP trajectory for BelgiumHypothetical GDP trajectory for Belgium

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Pre-crisisPost-crisis

Pre-crisis: average annual growth of 2.3%Pre-crisis: average annual growth of 2.3%Post-crisis: average annual growth of 1.4%Post-crisis: average annual growth of 1.4%By 2020 and going forward: GDP 11% lowerBy 2020 and going forward: GDP 11% lower

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-6%-4%-2%0%2%4%6%8%

10%12%14%

BG LU DK EE CY FI SE SK RO CZ SI LT NLHU MT DE PL AT EA BE

EU27 EL PT IT ES FR LV UK IE IE

Required primary balance Budgetary effort

Fiscal sustainabilityFiscal sustainabilityRequired consolidation to bring debt to 60% by 2020Required consolidation to bring debt to 60% by 2020

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Developments in debt up to 2020Developments in debt up to 2020

Graph I.3.6: Developments up to 2020 in the gross debt-to-GDP ratio in euro-area Member Statesassuming no consolidation on top of fiscal stimulus withdrawal

IE

SI

SK

LU

IE

MT

MT

CY

CY

IT

IT

FR

FR

ES

ES

FI

FI

EA

EADE

DENL

NL

AT

AT

BE

BE

PT

PT

SI

SK

EL

EL

LU5

25

45

65

85

105

125

145

165

185

205

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Gro

ss d

ebt

IE MT CY IT FR ES FI EA DE NL AT BE

PT SI SK EL LU

% of GDP

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EU EU15 Belgium

2008 2060 2008 2060 2008 2060

Fertility rate 1.52 1.64 1.64 1.72 1.75 1.79

Life expectancy at birth – men 76.0 84.5 77.2 84.8 76.7 84.4

Life expectancy at birth – women 82.1 89.0 82.6 89.1 82.3 88.9

Old age dependency ratio 25 53 26 51 26 46

Net migration flows (thousands) 1683 804 1647 750 51 23

Net migration flows (% population) 0.3 0.2 0.4 0.2 0.5 0.2

Some background figures on Some background figures on demographicsdemographics

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Budgetary costs of population ageingBudgetary costs of population ageing

Costs set to increase substantially but with wide Costs set to increase substantially but with wide variation between countriesvariation between countries

Pension spending

HealthcareLong-term care, unemployment and education

Total

2010

Change 2010

to 2060 2010

Change 2010

to 2060 2010

Change 2010

to 2060 2010

Change 2010

to 2060

Poland 10.8 -2.1 4.1 0.8 4.2 0.1 19.1 -1.1

Estonia 6.4 -1.6 5.1 1.1 3.2 0.4 14.8 -0.1

Latvia 5.1 0.0 3.5 0.5 3.6 0.8 12.3 1.3

EU-27 10.2 2.3 6.8 1.4 6.1 0.9 23.2 4.6

EA 11.2 2.7 6.8 1.3 6.4 1.1 24.5 5.1

Belgium 10.3 4.5 7.7 1.1 8.9 1.0 26.8 6.6

Slovenia 10.1 8.5 6.8 1.7 6.2 2.4 23.1 12.7

Greece 11.6 12.5 5.1 1.3 5.2 2.2 21.9 16.0

Luxembourg 8.6 15.3 5.9 1.1 5.4 1.7 19.9 18.2

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-2%0%2%4%6%8%

10%12%14%16%18%20%

Fiscal sustainabilityFiscal sustainability

Sustainability gaps (S2 in percent of GDP)(latest available unpublished, data)

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EAEU27

BE

BG

CZ

DK

DE

EE

IE

EL

ES

FRIT

CY

LV

LT

LU

HU

MT

NL

AT

PL

PT

RO

SI

SKFI

SE

UK

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

-14.0 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0

Favourable long-term projections

Favorable initial f iscal position Unfavorable initial f iscal position

No sustainability gap(S2<0)

Sustainability gap(S2>0)

LTC (% of GDP)

IBP (% of GDP)

Unfavourable long-term projections

S2=0 S2=16S2=14

S2=12

S2=10S2=8S2=6S2=4S2=2

IBP: required adjustment given the initial budgetary positionLTC: required adjustment given the long-term change in age-related expenditure

Decomposition of the S2 indicator

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-10

-5

0

5

10

HU PT IT DE CY FR DK CZ EA* SE EU27* LU PL BE EE SK AT FI SI LT NL MT UK ES LV EL IE

Difference due to IBP Difference due to LTC

Residual (extension of projection 2050-60) Total difference between 2006 and 2009 reports

Comparing the sustainability gaps in 2009 and 2006

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60

70

80

90

100

110

120

130

140

150

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Baseline 0.5% per year 1% per year

Examples of debt and consolidation in Examples of debt and consolidation in BelgiumBelgiumTrajectory of debt as a share of GDP based on different Trajectory of debt as a share of GDP based on different levels of consolidationlevels of consolidation

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Time to Time to designdesign exit exit strategiesstrategies??

EU Council - 17 SeptemberEU Council - 17 September““Exit strategies need to be designed now and implemented in a coordinated manner Exit strategies need to be designed now and implemented in a coordinated manner

as soon as recovery takes hold, taking into account the specific situations of as soon as recovery takes hold, taking into account the specific situations of individual countries.”individual countries.”

Pittsburgh Summit – 24-25 September Pittsburgh Summit – 24-25 September ““We will prepare our exit strategies and, when the time is right, withdraw our We will prepare our exit strategies and, when the time is right, withdraw our

extraordinary policy support in a cooperative and coordinated way, maintaining extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility.”our commitment to fiscal responsibility.”

Informal ECOFIN – 1-2 October Informal ECOFIN – 1-2 October ““In order to anchor expectations and reinforce confidence, it is necessary to start In order to anchor expectations and reinforce confidence, it is necessary to start

designing and communicating credible exit strategies, even if implementation will designing and communicating credible exit strategies, even if implementation will have to wait.”have to wait.”

IMFC Statement – Istanbul 4 October IMFC Statement – Istanbul 4 October ““As the recovery takes hold, we are committed to work together in articulating and As the recovery takes hold, we are committed to work together in articulating and

implementing credible and coordinated exit strategies for the withdrawal of public implementing credible and coordinated exit strategies for the withdrawal of public support for the financial sector, orderly unwinding of monetary policy support, support for the financial sector, orderly unwinding of monetary policy support, and fiscal consolidation needed to underpin long-term sustainability.”and fiscal consolidation needed to underpin long-term sustainability.”

ECOFIN Council – 20 October ECOFIN Council – 20 October ““The Council agrees that preparing a coordinated exit strategy for exiting from the The Council agrees that preparing a coordinated exit strategy for exiting from the

broad-based policies of stimulus is needed.... The Council underlines that an early broad-based policies of stimulus is needed.... The Council underlines that an early design and communication of such a strategy would contribute to underpinning design and communication of such a strategy would contribute to underpinning confidence in our medium-term policies and to anchor expectations”confidence in our medium-term policies and to anchor expectations”

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ECOFIN Council 20 October 2009ECOFIN Council 20 October 2009Designing fiscal exit strategiesDesigning fiscal exit strategies

Withdrawal of stimulus should be timely. Withdrawal of stimulus should be timely. Consolidation should start in 2011 at the Consolidation should start in 2011 at the latest, with some countries needing to latest, with some countries needing to consolidate earlier.consolidate earlier.

Consolidation will need to go well beyond the Consolidation will need to go well beyond the benchmark 0.5% of GDP per annum.benchmark 0.5% of GDP per annum.

Important additions:Important additions: Strengthened national budgetary frameworks to Strengthened national budgetary frameworks to

underpin credibility of consolidation.underpin credibility of consolidation. Measures to support long-term fiscal sustainabilityMeasures to support long-term fiscal sustainability Strengthening of structural efforts to enhance Strengthening of structural efforts to enhance

productivity and support long term investmentproductivity and support long term investment

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What do we know about how to What do we know about how to consolidate successfully?consolidate successfully?

Extensive literature on the subject including Alesina and Perotti Extensive literature on the subject including Alesina and Perotti (1995), Public finances in EMU 2007, Kumar et al. (2007).(1995), Public finances in EMU 2007, Kumar et al. (2007).

Consolidations based on expenditure cuts tend to be longer lasting Consolidations based on expenditure cuts tend to be longer lasting Especially true if also focus on structural reforms increasing work Especially true if also focus on structural reforms increasing work

incentives and public sector efficiencyincentives and public sector efficiency Tax based consolidation tends to work better if it is gradual and starts Tax based consolidation tends to work better if it is gradual and starts

from a lower levelfrom a lower level

Gradual adjustments have proven more effective (Public finances in Gradual adjustments have proven more effective (Public finances in EMU 2007)EMU 2007)

Often accompanied by structural reformsOften accompanied by structural reforms

Improvements in the fiscal institutions can be important Improvements in the fiscal institutions can be important complements to consolidationcomplements to consolidation

Countries with existing strong institutions consolidate more effectivelyCountries with existing strong institutions consolidate more effectively

Difficult macroeconomic and public finance starting points can be Difficult macroeconomic and public finance starting points can be catalysts for successful consolidationscatalysts for successful consolidations

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The quality of the public finances in The quality of the public finances in BelgiumBelgium

Size of government

Fiscal position andsustainability

Composition andefficiency of spending

Composition andefficiency of revenue

systems

Fiscal governance

EU 15 meanBelgium

Note: a higher value indicates outcomes more conducive to long-term growth

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Belgium – what choices are available?Belgium – what choices are available?

Reducing expenditure?Reducing expenditure? Government spending is high, so possibility to reduce Government spending is high, so possibility to reduce

itit Efficiency gains also possibleEfficiency gains also possible

Increasing tax?Increasing tax? Tax and SS revenues high and relatively inefficientTax and SS revenues high and relatively inefficient Increasing them further could be costly and hardIncreasing them further could be costly and hard

Structural reforms?Structural reforms? The tax system has strong disincentives to work in itThe tax system has strong disincentives to work in it

Pension changes for the long term?Pension changes for the long term? Scope to change the pension system but can only be Scope to change the pension system but can only be

a part of the answera part of the answer

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How to reduce the cost of ageing over How to reduce the cost of ageing over timetime

Stockholm strategy from the 2001 European CouncilStockholm strategy from the 2001 European Council

Reduce debt to allow pre-financingReduce debt to allow pre-financing Would need to be in addition to reversing debt increases Would need to be in addition to reversing debt increases

due to crisisdue to crisis Could only be achieved very graduallyCould only be achieved very gradually Might add to global imbalancesMight add to global imbalances

Increase employment rates and productivityIncrease employment rates and productivity Can accompany fiscal consolidationCan accompany fiscal consolidation May not reduce the cost of ageing much due to accrual May not reduce the cost of ageing much due to accrual

of pension rightsof pension rights

Reform pension, healthcare and long-term care Reform pension, healthcare and long-term care systemssystems Shifting to private provision also has risksShifting to private provision also has risks Adequacy of provision must be ensured to make any Adequacy of provision must be ensured to make any

changes effectivechanges effective Raising retirement ages is a serious considerationRaising retirement ages is a serious consideration

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5556575859606162636465

LU SI AT BE MT FR BG IT PL HU SK EA EL EU CZ FI NL ES DE DK UK RO LT LV EE PT CY IE SE

Exit ages from the labour marketExit ages from the labour market

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30

5.3%

6.5%5.8%

4.8%

6.2%

5.4%4.9%

6.3%

5.5%

3.6%

4.8%4.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

BE EU27 EA

Baseline value for the sustainability gap in % of GDPIncreasing overall employment rate by 1% between 2010 and 2020Increasing employment rate of older workers by 5% between 2010 and 2020Increasing the pension age by 5 years between 2010 and 2060

How can changes to the labour market or How can changes to the labour market or pension structure aid sustainability?pension structure aid sustainability?

DG ECFIN


31

Conclusions Conclusions

Crisis has had both a direct and indirect Crisis has had both a direct and indirect impact on public financesimpact on public finances

Increase in government debt substantial and Increase in government debt substantial and worryingworrying

The existing challenge of ageing looms large The existing challenge of ageing looms large over the futureover the future

Exiting the crisis will be a delicate exerciseExiting the crisis will be a delicate exercise

Measures addressing both medium-term deficits and Measures addressing both medium-term deficits and long-term increases in the cost of ageing are requiredlong-term increases in the cost of ageing are required

sustainable public finances in a turbulent eu economy

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