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Some Uncomfortable Arithmetic Regarding Europe’s Public Finances

  • International Monetary Fund

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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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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  1. Balassone, Fabrizio & Cunha, Jorge Correia da & Langenus, Geert & Manzke, Bernhard & Pavot, Jeanne & Prammer, Doris & Tommasino, Pietro, 2009. "Fiscal sustainability and policy implications for the euro area," Discussion Paper Series 1: Economic Studies 2009,04, Deutsche Bundesbank, Research Centre.
  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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