Assessing long-term fiscal sustainability Frank Eich Macroeconomic Policy and International Finance Directorate frank.eich@hm-treasury.gov.uk 13.11.2003 1
Overall context EU member states face rapidly ageing populations more older people due to increased longevity working-age populations projected to fall and age fertility rates below replacement rates Trend similar in other developed countries EU countries have highly developed welfare states 13.11.2003 2
Old-age dependency ratios 80 60 Per cent 40 20 0 1950 1975 2000 2025 2050 Germany Spain UK Weighted EU average Czech Republic Australia Japan USA China Source: UN, World Population Prospects 2002. 13.11.2003 3
Why should finance ministries care? Long-term trends could affect longterm sustainability of public finances Trends might have distributional effect Governments need to know about the future 13.11.2003 4
Legal requirements in the UK Government introduced Code for Fiscal Stability in 1998, which requires government to state its fiscal objectives and rules for fiscal policy publication of illustrative long-term fiscal projections, covering at least ten years 13.11.2003 5
UK fiscal objectives Support monetary policy Allow automatic stabilisers to smooth economy Ensure sustainable public finances Ensure spending, tax impacts fairly within & between generations Ensure sustainable public finances Ensure spending, tax impacts fairly within & between generations Promote long-term economic growth time Short term Medium term Long term 13.11.2003 6
UK starting position Fiscal rules meet golden rule (borrow only to invest) over the economic cycle sustainable investment rule: public sector net debt as a proportion of GDP at a stable & prudent level Public finances relatively low net (and gross) debt to GDP ratio Demography population ageing less rapidly than in most other EU countries 13.11.2003 7
Net debt to GDP ratios in G7 120 100 per cent of GDP 80 60 1995 2000 2004 40 20 0 United Kingdom Canada France United States Source: OECD Economic Outlook June 2003. Germany Japan Italy 13.11.2003 8
Illustrative long-term projections Published in Budget document Based on medium-term forecast Simple top-down projections show net debt as a share of GDP potential growth rate of current consumption 13.11.2003 9
Illustrative long-term projections (per cent of GDP) 45 40 35 30 25 20 15 10 5 0 Total current spending Transfers Current consumption Net debt 2002-03 2008-09 2012-13 2022-23 2032-33 13.11.2003 10
Long-term public finance report Motivation provide comprehensive picture of the sustainability of the public finances provide indication of generational fairness generate better information for policy makers stimulate public debate on key issues affecting all Report focuses on demographic changes but not, for example, global warming 13.11.2003 11
Long-term public finance report (cont.) Report based on comprehensive set of revenue and spending projections. Used for: bottom up projections, intertemporal budget gap, fiscal gap, and generational accounting 13.11.2003 12
Long-term public finance report (cont.) First report concluded UK public finances sustainable and in relatively strong position generational accounting suggests high degree of inter-generational fairness 13.11.2003 13
What difference does it make? Presents the bigger picture in which policy decisions have to be made Coherent approach to assessing long-term policy issues, useful for other departments Addresses important issues, which are often considered not to be urgent Encourages other countries to be more transparent about future challenges 13.11.2003 14
Some thoughts on domestic work Technical expertise had to be built up internally, working closely with outside academics Coordinating input from other ministries time consuming Colleagues and policy makers often not used to these time horizons Presentation key target audience? 13.11.2003 15
International comparisons Similar work is done in other countries, e.g.: Australia s inter-generational report New Zealand s long-term projections EU countries submit long-term projections to European Commission as part of Stability and Convergence Programmes United States Congressional Budget Office produces long-term projections different degrees of comprehensiveness 13.11.2003 16
Working Group on Ageing Mandate from European Finance Ministers to assess budgetary impact of ageing in EU countries Work started in 2000, first comprehensive report now finished Main value added is that countries used commonly agreed assumptions and methodology Projections cover public pensions, health and long-term care, education, unemployment benefits but not global warming 13.11.2003 17
Working Group on Ageing Age-related spending projected to increase by between 3 and 7 per cent of GDP in most countries Main drivers: pensions and health spending Despite fewer young people, education spending unlikely to offset projected increases elsewhere Budgetary imbalances projected to arise in many EU countries over next 30 to 40 years 13.11.2003 18
EU spending projections Projected spending difference between 2000 and 2050 5 4 3 per cent of GD P 2 1 0-1 Pensions Health care Long-term care Education Unemployment transfers -2 Unweighted EU average, calculated using projections from participating member states. Source: EPC Working Group on Ageing 2003. 13.11.2003 19
What difference does it make? Pension and health system reforms now top of policy agenda in many EU countries Working group provides technical background to policy discussion on EU and national level Finance ministers keen to monitor progress mandate to update and refine projections by 2005 (including new EU countries) 13.11.2003 20
Some thoughts on int l work Interesting experience to work on these issues with other countries and exchange expertise Issues complex & differ from country to country Agreeing on assumptions, methodology and presentation not easy How can future projections be improved, e.g. non-demographic drivers of health spending EU at leading edge of analysis, possibly ahead of many other organisations & countries 13.11.2003 21
Where next? Analyse impact of ageing on productivity and more generally trend growth? How to control health spending growth? Use comprehensive projections to predict future demand for capital stock & inform investment plans? Presentation style: who is reading it, academics, general public etc? Suggestions? 13.11.2003 22
References UK Illustrative long-term fiscal projections http://www.hmtreasury.gov.uk/budget/bud_bud03/budget_report/bud_bud03 _repannexa.cfm Long-term public finance report http://www.hmtreasury.gov.uk/pre_budget_report/prebud_pbr02/assoc_docs /prebud_pbr02_adsustain.cfm European Commission s Economic Policy Committee http://europa.eu.int/comm/economy_finance/epc/epc_reports_en.ht m 13.11.2003 23