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Some Uncomfortable Arithmetic Regarding Europe’s Public Finances

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  • International Monetary Fund

Abstract

Traditional fiscal indicators focused on measures of current deficits and debt miss the potentially important implications of current policies for future public finances. This could be problematic, including in the case of Europe, where population aging is expected to pose additional fiscal costs not captured by such indicators. To better gauge the state of public finances in the EU27 countries, this paper derives forward-looking fiscal measures of intertemporal net worth both directly from the European Commission’s Aging Working Group’s long-run indicators and using a comprehensive public-sector balance sheet approach. These measures could be used as an "early warning" mechanism and also as a communication device with the public. Current estimates indicate that, on existing policies, the intertemporal net worth of the EU27 is deeply negative, even in excess of its GDP level, and is projected to worsen further over time. This suggests that Europe’s current policies need to be significantly strengthened to bring future liabilities in line with the EU governments’ capacity to generate assets.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/177.

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Length: 32
Date of creation: 01 Jul 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/177

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Keywords: Fiscal sustainability; Aging; Budgets; Fiscal management; Public finance; pension; public finances; budget constraint; fiscal adjustment; pension reforms; fiscal indicators; fiscal positions; fiscal position; fiscal policies; primary deficit; pension systems; fiscal gap; fiscal policy; pensions; fiscal costs; fiscal measures; budgetary position; fiscal data; health care; fiscal imbalance; fiscal effort; fiscal balance; public debt; fiscal projections; pension liabilities; pension costs; pension reform; public pension; fiscal revenues; debt obligations; future pension; dependency ratios; primary fiscal balance; budget constraints; retirement; fiscal rules; fiscal crisis; fiscal outcomes; fiscal surpluses; private pension; fiscal imbalances; early retirement; fiscal stance; pension legislation; current pension; retirement saving; pension expenditure; national budget; replacement rates; pension payments; fiscal consolidation; fiscal issues; public pension systems; structural fiscal; fiscal stimulus; fiscal adjustments; pension debt; fiscal health; fiscal outlook; dependency ratio; public expenditures; public pension schemes; private pension systems; fiscal space; pensioner; pension schemes; fiscal assumptions; fiscal consolidation to growth; pension contributions; excessive deficit procedure; fiscal deficit;

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  1. Balassone, F. & Cunha, J. & Langenus, G. & Manzke, B. & Pavot, J. & Prammer, D. & Tommasino, P., 2008. "Fiscal sustainability and policy implications for the euro area," Working papers 225, Banque de France.
  2. Franco, Daniele & Marino, Maria Rosaria & Zotteri, Stefania, 2004. "Pension Expenditure Projections, Pension Liabilities and European Union Fiscal Rules," Discussion Paper 231, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
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Cited by:
  1. Stavros A. Zenios, 2013. "The Cyprus Debt: Perfect Crisis and a Way Forward," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 7(1), pages 3-45, June.
  2. Lojsch, Dagmar Hartwig & Rodríguez-Vives, Marta & Slavík, Michal, 2011. "The size and composition of government debt in the euro area," Occasional Paper Series 132, European Central Bank.
  3. Nan Geng, 2013. "Toward A Sustainable and Inclusive Consolidation in Lithuania," IMF Working Papers 13/157, International Monetary Fund.

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