respective GDPs. The present discounted values of EU member nations’ projected GDPs
are shown in Figure 3.8.
Figure 3.6 shows the demographic component of FI. It shows the excess imbalance
resulting from replacing a particular country’s demographic structure with the EU
benchmark demographic structure. The figure reports this excess as a percent of the FI
estimated for the EU benchmark case. Thus, positive numbers indicate demographic
features that increase budget shortfalls under current (EU benchmark) fiscal policies -
either population aging that is more rapid due to increases in longevity, or a larger than
average baby-boom generation approaching retirement, or a baby-boom generation that is
closer to retirement than under the EU benchmark case, or a recent relatively more rapid
decline in fertility that reduces the number of tax-paying workers.
Figure 3.6 suggests that despite their large FI estimates - in both absolute euro terms and
as percentages of the present value of GDP - population aging is not more rapid than
average in the case of Germany, Italy and the United Kingdom. This result may appear
surprising, but it must be noted that these large countries contribute significantly to the
“average” demographics of the EU benchmark. On the other hand, France’s
demographics causes a 5 percent increase in FI relative to the EU benchmark FI. The
largest FI-increasing influence of demographics appears in the cases of Ireland and Malta,
whereas Estonia, Lithuania, and Latvia appear to have younger projected populations or
slower population aging through 2051.
Figure 3.7 shows the budget allocation components of FI for EU member states. As
mentioned earlier, this experiment replaces a particular country’s harmonized tax,
transfer, and spending components with those of the EU benchmark case. Figure 3.7
shows that the budget-allocations of Germany, France, and the United Kingdom
contribute significantly toward high FI values. However, Denmark and Luxembourg
appear to be following “budget allocation” policies with the largest prospective fiscal
impact in terms of generating high FI values. Most of the new entrants into the EU appear
to be following budget allocation policies consistent with reducing fiscal imbalances.
Similar experiments are not implemented here for the productivity and cohort-distribution
components because the required data are unavailable. In the case of productivity, a
straightforward replacement of a member country’s productivity growth rate would not be
appropriate because a higher productivity rate would generally reduce the projected levels
of future means-tested social transfer programs and may be associated with higher
revenues in a nonlinear manner. Implementing this experiment requires careful
calibration of the response of welfare expenditures to changes in productivity growth -
that is not feasible given data availability.46
Adequate information is also not available for estimating the impact of country-specific
cohort-distribution policies. However, the experiments described earlier of isolating the
demographic and budget allocation components provide the basic framework for isolating
these components as well. Finally, estimating GI measures is also not feasible given that
This observation may cast doubt on the validity of constructing the EU productivity benchmark as
described in the text. However, that appears to be the best, if not the only, alternative.
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