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Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations

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  • Rossana Merola
  • Douglas Sutherland

Abstract

During the economic and financial crisis, fiscal positions across the OECD countries deteriorated sharply. This raises the question of what level of primary deficit would ensure long-term sustainability and what degree of consolidation is needed. The purpose of this paper is to gauge the scale of fiscal consolidation that will be needed to ensure long-term sustainability. The analysis uses so-called fiscal gaps to provide a simple metric for how much consolidation is needed under a series of different assumptions and scenarios. The aim is to highlight the scale of the problems, how they differ across countries and the uncertainties surrounding the estimates. A first set of results suggest that lower debt targets provide greater room for manoeuvre to react to shocks in the future. A second set of results shows that growth-enhancing structural reforms | especially reforms of pension systems | can mitigate budget pressures resulting from ageing populations and hence contribute to fiscal consolidation. Furthermore, raising efficiency in the provision of health care and education can reduce budgetary pressures. Finally, achieving debt objectives under shocks to interest rates or to government spending would require additional tightening in most of the OECD countries. Consolidation budgétaire : Partie 3. Projections à long terme et calcul des écarts budgétaires Durant la crise économique et financière, la position budgétaire des pays de l’OCDE s’est nettement dégradée. La question se pose dès lors de savoir quel niveau de déficit primaire assurerait la viabilité à long terme et quel degré d’assainissement est nécessaire. Ce document a pour objet d’évaluer l’ampleur de l’effort de consolidation budgétaire à consentir pour assurer la viabilité à long terme. L’analyse s’appuie sur les « écarts budgétaires », qui permettent de mesurer simplement l’ampleur de l’assainissement nécessaire suivant divers scénarios et hypothèses. L’objectif est de mettre en lumière l’échelle des problèmes, les différences qui existent d’un pays à l’autre et les incertitudes qui entourent les estimations. Une première série de résultats semble indiquer que des objectifs de dette plus bas offrent une plus grande marge de manoeuvre pour réagir aux chocs dans l’avenir. Une seconde série de résultats montre que des réformes structurelles propres à renforcer la croissance – en particulier les réformes des systèmes de retraite – peuvent atténuer les pressions budgétaires dues aux vieillissement des populations et, partant, contribuer à l’assainissement des finances publiques. Par ailleurs, rehausser l’efficience dans la prestation de services de santé et d’éducation peut atténuer les pressions budgétaires. Enfin, des chocs affectant les taux d’intérêt ou les dépenses publiques nécessiteraient un resserrement budgétaire plus sévère dans la plupart des pays de l’OCDE.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 934.

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Date of creation: 10 Jan 2012
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Handle: RePEc:oec:ecoaaa:934-en

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Keywords: ageing populations; long-term projections; fiscal consolidation; long-term public finance sustainability; public social expenditure; viabilité des finances publiques à long terme; dépenses sociales publiques; projections à long terme; consolidation budgétaire; vieillissement de la population;

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  1. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
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Citations

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Cited by:
  1. Sutherland, Douglas, 2012. "Fiscal Consolidation Needs and Implications for Growth," MPRA Paper 38745, University Library of Munich, Germany.
  2. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: How Much, How Fast and by What Means?," OECD Economic Policy Papers 1, OECD Publishing.
  3. Ã…sa Johansson & Yvan Guillemette & Fabrice Murtin & David Turner & Giuseppe Nicoletti & Christine de la Maisonneuve & Philip Bagnoli & Guillaume Bousquet & Francesca Spinelli, 2013. "Long-Term Growth Scenarios," OECD Economics Department Working Papers 1000, OECD Publishing.
  4. 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).
  5. Romain Bouis & Ane Kathrine Christensen & Boris Cournède, 2013. "Deleveraging: Challenges, Progress and Policies," OECD Economics Department Working Papers 1077, OECD Publishing.
  6. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
  7. Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
  8. Gabriela Lopes de Castro & José R. Maria & Ricardo Mourinho Félix & Cláudia Braz, 2013. "Ageing and fiscal sustainability in a small euro area economy," Working Papers, Banco de Portugal, Economics and Research Department w201304, Banco de Portugal, Economics and Research Department.
  9. Ondra Kamenik & Zdenek Tuma & David Vavra & Zuzana Smidova, 2013. "A Simple Fiscal Stress Testing Model: Case Studies of Austrian, Czech and German Economies," OECD Economics Department Working Papers 1074, OECD Publishing.
  10. Galo Nuño & Cristina Pulido & Rubén Segura-Cayuela, 2012. "Long-run growth and demographic prospects in advanced economies," Banco de Espa�a Occasional Papers 1206, Banco de Espa�a.
  11. Artzrouni, Marc & Tramontana, Fabio, 2013. "The debt trap: a two-compartment train wreck," MPRA Paper 47578, University Library of Munich, Germany.
  12. David Gruen & Duncan Spender, 2012. "A Decade of Intergenerational Reports: Contributing to Long-Term Fiscal Sustainability," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 45(3), pages 327-334, 09.

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