3.6
Conclusion
This chapter began by observing that EU countries are undergoing twin transitions: a
demographic transition wherein the populations of most EU countries are aging and an
economic transition resulting from the adoption of a single currency and associated
adjustments in fiscal constraints and agreements. These processes are likely to impose
severe and conflicting pressures on policymakers, on the one hand, to increase deficit
spending to support expanding retiree cohorts and, on the other, to limit deficits and debt
in order to continue expanding a heretofore successful process of monetary unification.
This chapter proposes the adoption of an extended framework of budget accounting and
reporting within the context of the SGP’s long-term fiscal policy surveillance
requirement. Among the several available fiscal measures, this chapter argues for
adopting fiscal and generational imbalance measures because they can potentially
incorporate comprehensive and policy relevant information about the future implications
of continuing current policies. The baseline FI and GI estimates can be supplemented
with their demographic, budget allocation, productivity growth, and cohort-distribution
policy components. The advantage of doing so is to present policymakers with tools for
comparing inter-country differences in fiscal stances and for evaluating the feasibility and
likely economic effects of alternative policy options.
This chapter argues in detail why traditional debt and deficit measures can be potentially
misleading as measures of a government’s fiscal stance. It also argues that accrual-
accounting approaches, although already adopted by several countries, are less
appropriate for government entities than for private ones. Among generational accounting
and fiscal and generational imbalances, the two latter measures appear simpler to
communicate and can be more easily integrated into existing budget reports - as
demonstrated through a prototype reporting template described in this chapter.
This chapter also provides provisional estimates of fiscal imbalances for 23 EU countries
and for the EU benchmark case under a projection horizon extending from 2004 through
2051. Although they are based on provisional and incomplete data, they are likely to be
reasonably accurate estimates of prevailing fiscal imbalances in EU member countries
and of the sources of inter-country differences. The estimated fiscal imbalances are quite
large for many EU countries. On average, EU countries face a Fiscal Imbalance of 8.3
percent of the present value of GDP projected through 2051. That implies a considerable
shortfall of resources to pay for social transfers and other general government
expenditures during the next four or five decades.
The estimates show considerable differences in underlying demographics and budget
allocations that generate the country-specific FI values. In addition, the results show a
much higher rate of accruing fiscal costs compared to public balances reported under
traditional and backward-looking budget measures. Those accruals suggest the need to
adopt fiscal adjustments to resolve outstanding EU fiscal imbalances sooner rather than
later.
Future fiscal adjustments would involve combinations of tax increases or reductions in
social and other expenditures. On balances, it appears that EU countries need to undergo
a third transition in order to facilitate a resolution of outstanding fiscal imbalances - one
that results in a retrenchment in the existing system of social protections—if only because
the current protections appear to be unaffordable. Attempting to redress existing fiscal
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