institutional details about financing arrangements for various subprograms are not
available (to the author).47
The Impact of Delaying Fiscal Adjustments
It is easy to show that FI grows larger over time if the initial FI value is positive (see
Appendix A in Gokhale and Smetters, 2003). That is because of accruing interest on the
current FI - similar to that on a corpus of outstanding debt. When FI is calculated over a
finite projection horizon, the addition of another year’s budget surplus or shortfall at the
end of the horizon also influences next year’s FI estimate. Table 3.3 shows estimates of
FI for EU countries through the year 2010. Each estimate covers a rolling period of 47
years - 2004 through 2051 for the FI reported under “2004”; 2005 through 2052 for the
FI reported under “2005”; and so on. These calculations are based on extending each EU
member nation’s demographic projections for a few additional years beyond 2051.
Table 3.3 shows that FI (calculated over a 47 year horizon) for the EU benchmark case
grows from €1,971 billion in 2004 to €2,489 billion by 2010 if current policies and long-
term projections remain unchanged through that year. The increase in FI from one year to
the next generally implies an increase in the cost of future fiscal adjustments because the
resources available to pay for the shortfalls, the present value of GDP, generally grow at a
slower rate.
Table 3.3 shows that with each passing year, about one-third of the increase in FI arises
from advancing the terminal year of the projection horizon by an additional year. The
remainder of the increase in FI arises from accruing interest. This indicates the
shortcoming of adopting a finite projection horizon for capturing the cost of postponing
fiscal adjustments. Were policymakers to adopt fiscal adjustments to reduce fiscal
imbalances as measured under a limited time horizon, a positive fiscal imbalance would
re-emerge in the very next year and grow larger over time.48
Take the case of France. The French government reported a deficit of 2.9 percent of GDP
- that is, €49.6 billion - in 2005.49 According to Table 3.3, however, the change in the
French FI for 2005 equals €368.2 billion - an order of magnitude larger than the reported
fiscal deficit for 2005. Similar remarks apply to current reporting on many other EU
countries’ fiscal stance based on traditional deficit and debt measures. Table 3.4
compares the reported annual public balances (Eurostat) with FI accruals for 2005 taken
from Table 3.3. In the case of some EU countries, a surplus public balance indicates an
improving fiscal condition, but the FI accrual is positive pointing to the opposite
conclusion. Thus, depending on backward-looking fiscal measures such as deficits and
debt would cause policymakers to draw incorrect conclusions about their country’s
evolving fiscal condition.
47
48
49
However, see Gokhale and Smetters (2006) for examples based on calculations for U.S. Social
Security and Medicare programs.
These calculations were made after extending the official (Eurostat) population projections beyond
2051. Details regarding the methods used are available from the author upon request.
Indicateurs de progrès de l’économie française (2006).
79