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Setting targets for government budgets in the pursuit of intergenerational equity

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  • Heikki Oksanen
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    Abstract

    The Stability and Growth Pact (SGP) adopted in 1997 originally set budget balance as the medium-term objective (MTO) for all EU Member States, to create a safety margin under the 3% of GDP deficit ceiling. In a reform in 2005, MTOs were made country-specific and dependent on initial debt and the potential growth rate. They were agreed for a transition period, until the criteria for taking into account implicit pension liabilities under ageing populations were established. Preparations for this are currently (early 2009) ongoing. Against this backdrop, this paper explores possible benchmarks for setting MTOs under alternative rules for the public pension system, based on the principle of ‘actuarial neutrality across generations'. The effects of privatisation of the mandatory pension system are spelled out. The ongoing revision of the national accounts will establish new accounts for the (implicit) pension liabilities of governments. This will allow targets to be set for explicit and implicit government debt in the light of intergenerational equity. One of the conclusions to emerge from current trends and policies is that reassessing the generosity of public pensions, especially the generously low retirement age in Europe, will remain high on the political agenda, as otherwise the burden to be shouldered by future generations will continue to increase.

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    File URL: http://ec.europa.eu/economy_finance/publications/publication13933_en.pdf
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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 358.

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    Length: 38 pages
    Date of creation: Apr 2009
    Date of revision:
    Handle: RePEc:euf:ecopap:0358

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    Keywords: medium-term objectives; government budgets; Stability and Growth Pact; ageing populations; public pensions; ageing;

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    1. Wyplosz, Charles, 2002. "Fiscal Policy: Institutions versus Rules," CEPR Discussion Papers 3238, C.E.P.R. Discussion Papers.
    2. Bosworth, Barry & Burtless, Gary, 2004. "Pension Reform and Saving," National Tax Journal, National Tax Association, vol. 57(3), pages 703-27, September.
    3. Roel Beetsma & Heikki Oksanen, 2007. "Pension Systems, Ageing and the Stability and Growth Pact," CESifo Working Paper Series 2141, CESifo Group Munich.
    4. Sinn, Hans-Werner, 2004. "The pay-as-you-go pension system as fertility insurance and an enforcement device," Munich Reprints in Economics 938, University of Munich, Department of Economics.
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    6. Roel Beetsma & Heikki Oksanen, 2008. "Pensions under Ageing Populations and the EU Stability and Growth Pact ," CESifo Economic Studies, CESifo, vol. 54(4), pages 563-592, December.
    7. Benoiˆt Coeure´ & Jean Pisani-Ferry, 2005. "Fiscal Policy in Emu: Towards a Sustainability and Growth Pact?," Oxford Review of Economic Policy, Oxford University Press, vol. 21(4), pages 598-617, Winter.
    8. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
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    11. Jean Pisani-Ferry, 2005. "Fiscal policy in EMU: towards a sustainability and growth pact," Working Papers 52, Bruegel.
    12. Oksanen, Heikki, 2005. "Public pensions in the national accounts and public finance targets," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(03), pages 291-312, November.
    13. Peter Whiteford & Edward Whitehouse, 2006. "Pension Challenges and Pension Reforms in Oecd Countries," Oxford Review of Economic Policy, Oxford University Press, vol. 22(1), pages 78-94, Spring.
    14. Guido Tabellini, 2003. "Principles of Policymaking in the European Union: an Economic Perspective," Levine's Working Paper Archive 506439000000000157, David K. Levine.
    15. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 65-113, 04.
    16. Paul van den Noord & Richard Herd, 1993. "Pension Liabilities in the Seven Major Economies," OECD Economics Department Working Papers 142, OECD Publishing.
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