Fiscal Imbalance Estimates and Components for EU Countries
The EU benchmark FI is calculated by using the methodology and data described earlier.
The population projections used for distributing 2004 budget aggregates by age and
gender, as described above based on projections taken from Eurostat through the year
2051. Future taxes, transfers, and general government spending on public goods are
estimated for the EU benchmark by applying an average labor productivity growth factor
of 0.24 percent per year. This average is calculated by taking a population-weighted
geometric mean of average growth in output per hour worked for each of the 23 EU
members between 1996 and 2004. The calculations use data on output per hour worked as
reported by Eurostat.
A fixed and constant real rate of discount is used for discounting projected fiscal flows
back to the year 2004. The inflation-adjusted discount rate is calculated as the interest rate
on long-term government bonds minus average expected inflation. Long-term budget
transactions spanning 50 or more years should be discounted using the government’s
opportunity cost of funds over a similar term. However, the longest-term interest rates
available are on 10-year government bonds. The geometric mean of annual rates
calculated over the period 1996-2005 and across all 23 EU countries (using data available
from Eurostat at the time of writing this chapter) equals 5.39 percent per year. Average
expected inflation is calculated as the geometric mean of inflation rates across all EU
countries from 1997 through 2005 (according to data availability). The resulting rate
(3.01 percent) is subtracted from the nominal interest rate on government bonds to obtain
a real discount rate of 2.38 percent.44
Figure 3.4 shows FI estimates for 23 EU countries and for the EU benchmark case
calculated for the base year - 2004.45 The EU-benchmark economy’s overall Fiscal
Imbalance is estimated at €1,971 billion. Of this, outstanding debt amounts to €282
billion, and the present value of prospective fiscal shortfalls equals €1,690 billion. Note
that the EU benchmark economy constructed is only one twenty-third as large as the sum
total of the 23 EU economies included in the calculations. Figure 3.5 shows that FI for the
EU benchmark equals 8.3 percent of the present value of GDP projected through the year
2051.
Figure 3.4 also shows that, in euro terms, Germany (€9,263), France (€9,111), Italy
(€5,054), and the United Kingdom (€7,666) contribute the largest fiscal imbalances.
However, relative to the present value of GDP, the largest imbalance ratios prevail for
Malta (12.8 percent of GDP, although Malta has the smallest fiscal imbalance in euro
terms) and Greece (10.9 percent of GDP). Estonia (3.2 percent of GDP), Ireland (3.4
percent of GDP), Lithuania (3.8 percent of GDP), and Latvia (4.9 percent of GDP) are
among those with the smallest fiscal imbalances as a percent of the present value of their
44
45
FI estimates under country-specific long-term interest rate differences are not calculated because
capital mobility over time may be expected to erase existing interest rate differentials on long-term
government debts. Any residual differences would reflect country-specific government default risks,
which are likely to be minor. The calculation’s details are available from the author upon request.
The estimates shown in Figure 3.4 use only one year’s revenues and expenditures for making future
projections. Since 2004 was neither a recession year nor a year of particularly strong growth, the
estimates are unlikely to be influenced by extreme cyclical variability of fiscal cash flows. If
projections of short-run budget forecasts had been available, the resulting FI estimates would have
been more accurate because such projections usually incorporate expected changes in future fiscal
flows due to policy changes that have already been enacted.
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