and country-specific fiscal structures to long-term fiscal imbalances would reveal the
feasibility and desirability of adopting differential adjustments by different EU member
nations.
Although it was argued earlier that the FI measure would be comprehensive only if
calculated over the infinite horizon, doing so in the European context proved impossible
given the limited amount of data available at the time of preparing the estimates. That is
because low fertility in EU countries and low net external immigration cause projected
populations to implode over time for several EU countries. Hence, the FI measures
reported in Section 3.5 below are calculated over a finite horizon—through the terminal
year of population projections available from Eurostat, 2051.38
3.5 Fiscal Imbalance Estimates for EU Countries
Overall Fiscal Imbalance and Its Decomposition by Sources - Demographics and
Budget Policy
This section presents FI estimates for 23 EU countries calculated using data available at
the time of writing.39 These estimates should be regarded as provisional because there
remains considerable scope for improving the underlying inputs. They are used here
mainly to complement the accounting and reporting framework being proposed.
Supplementing existing budget reports with FI and GI indicators would reveal the long-
term implications of current EU members’ policies and the sources of differences among
them. Notwithstanding the scope for improving the estimates, however, the numbers
reported here are based on detailed country-specific data and capture underlying inter-
country demographic and fiscal policy differences.
To reveal those differences, FI is first calculated for the average EU economy defined
with reference to four dimensions: demographics, productivity, budget allocations, and
generational policy. An “EU demographic benchmark” is constructed by averaging all
countries’ projected populations - separately by year, age (16 and older), and gender—
between 2004 and 2051.40 The EU demographic benchmark contains about 16 million
people.41
The “EU productivity benchmark” is constructed by calculating a population-weighted
geometric mean of annual labor productivity growth rates (output per hour worked)
across EU countries. Country-specific labor productivity growth rates are calculated by
using annual geometric average growth rates during the recent past - between 1996 and
2004.
38
39
40
41
As noted earlier, truncating the projection horizon at 2051 implies that a fully apples-to-apples
comparison of policy options would not be feasible because cost and benefits of alternative policies
beyond 2051 would be excluded from the calculations. However, adopting such long horizon
measures is still better than truncating the horizon after just five or ten years.
Cyprus and Hungary are excluded because data on their annual labor productivity growth are not
available.
Although the terminology employed is “EU benchmark,” it should be understood that the
calculations include just 23 countries. See the previous footnote.
Calculations regarding the construction of the “EU benchmark” and other calculations described
below are available from the author upon request.
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