shortfalls under current policy evaluated without a time limit. It is a comprehensive
measure of the government’s fiscal position because it spans the entire future without
limit and includes the totality of government’s operations. The FI measure is also easy to
communicate: It is the amount of additional resources that the government must have on
hand today, invested at interest, in order to continue current policies indefinitely.
Alternatively, FI equals the additional amount of net receipts or cost savings that the
government must obtain through future policy adjustments.30
Many practitioners express doubts about calculating and reporting fiscal imbalances
through the infinite future. Their main objection is that future projections are uncertain
and the degree of uncertainty increases the further forward budget projections are carried.
Hence, most agencies that report FI base them on projections truncated after 25, 50, or 75
years into the future.31 Although these objections appear valid, arguments favoring
infinite-horizon calculations seem to be stronger. First, setting any specific limit on the
projection horizon implies, at best, the assumption that the government budget is in
balance beyond that horizon. However, if current policies would result in large
imbalances persisting beyond the projection horizon, truncating the horizon would be
equivalent to ignoring future uncertainty - exactly the opposite of most recommendations
about how to deal with future uncertainty. A better approach would be to report those
imbalances under the best available economic assumptions and projections in addition to
the imbalances calculated under a truncated projection horizon.
Second, truncating the horizon usually leads to the “rolling-window” problem. Reforms
implemented to achieve budget balance through a predetermined time horizon would be
thrown off balance by the mere passage of time and relatively quickly.32 If future
imbalances are large and growing - as is likely to be the case in countries with rapidly
aging populations - it would necessitate repeated reforms to pull the government’s
finances back into balance to avoid escalating fiscal deficits.
The most important but often least appreciated reason for adopting infinite-horizon
calculations is that truncated budget projections would introduce a bias in policymaking.
The bias can be described using a simple example of a reform proposal to establish
“social security” personal accounts. Suppose such accounts were created by diverting a
portion of existing wage taxes (assumed to be dedicated to the program) for investment in
private securities. In exchange for allowing individuals to invest a part of their payroll
taxes in personal accounts, they would have to agree to actuarially fair reductions in their
future social security benefits. “Actuarially fair” means that for every euro of payroll
taxes deposited in personal accounts, future benefits worth one euro in present value
would be surrendered, where present values would be calculated using the government’s
long-term borrowing rate and average mortality factors.
30
31
32
Finally, unlike traditional measures of deficits and debt, this measure is not subject to change
because of the way certain government receipts and outlays are labeled - as taxes and transfers,
respectively, or borrowing and repayment of principal with interest, respectively.
However, both the Social Security and Medicare Trustees in the United States have been reporting
infinite-horizon measures of those programs’ financial shortfalls - precisely the “fiscal imbalance”
measure. They also report “generational imbalances” for both programs. The 2003 Technical
Advisory Panel that makes recommendations to the Trustees of Social Security and Medicare has
endorsed both measures as providing useful additional information.
This is a well-recognized phenomenon in the context of U.S. Social Security program which was
reformed in 1983 to achieve balance through 2058. Now, however, the program faces a sizable 75-
year shortfall because the new horizon includes financial shortfalls between 1959 and 2080.
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