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Fiscal sustainability and policy implications for the euro area

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  • Balassone, Fabrizio
  • Cunha, Jorge
  • Langenus, Geert
  • Manzke, Bernhard
  • Pavot, Jeanne
  • Prammer, Doris
  • Tommasino, Pietro

Abstract

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 EU's 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 government's 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. JEL Classification: H55, H60

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0994.

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Date of creation: Jan 2009
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Handle: RePEc:ecb:ecbwps:20090994

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Keywords: Fiscal sustainability; generational accounting; mediumterm objectives for fiscal policy; Population ageing;

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Cited by:
  1. Merola, Rossana & Sutherland, Douglas, 2014. "Fiscal Consolidation and Implications of Social Spending for Long-Term Fiscal Sustainability," Papers, Economic and Social Research Institute (ESRI) RB2014/1/2, Economic and Social Research Institute (ESRI).
  2. Christophe Van Nieuwenhuyze, 2013. "Debt, assets and imbalances in the euro area. An aggregate view," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 123-152.
  3. Axel H. Börsch-Supan, 2012. "Entitlement Reforms in Europe: Policy Mixes in the Current Pension Reform Process," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 405-435 National Bureau of Economic Research, Inc.
  4. Axel H. Börsch-Supan, 2012. "Entitlement Reforms in Europe: Policy Mixes in the Current Pension Reform Process," NBER Working Papers 18009, National Bureau of Economic Research, Inc.
  5. International Monetary Fund, 2010. "Some Uncomfortable Arithmetic Regarding Europe’s Public Finances," IMF Working Papers 10/177, International Monetary Fund.
  6. repec:dgr:uvatin:2009099 is not listed on IDEAS
  7. Bonin, Holger & Patxot, Concepció & Souto, Guadalupe, 2013. "Cyclically neutral generational accounting," ZEW Discussion Papers 13-099, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Torben M. Andersen & Marias H. Gestsson, 2010. "Longevity, Growth and Intergenerational Equity - The Deterministic Case," Economics wp52, Department of Economics, Central bank of Iceland.
  9. Klaus Weyerstrass & Reinhard Neck, 2013. "A young EU member’s ageing: budgetary and macroeconomic consequences of Slovenia’s demographic prospects," Empirica, Springer, Springer, vol. 40(3), pages 427-456, August.
  10. Jean-Claude Trichet, 2010. "Luncheon address: central banking in uncertain times: conviction and responsibility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 243-266.

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