Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005

budget balance would thus remain positive for a long period of time (to 2076),
cf figure 5, implying an accumulation of public wealth reaching more than 100%
of GDP, which can be used to finance the upward expenditure drift in the future
(cf also figure 7 below).

Figure 5: Primary balance - sustainable tax and no
reform

Source: Velfærdskommissionen (2005d)

To underline that other modes of financing are available note that the per-
manent reduction in public expenditures ensuring fiscal sustainability is about
3.2% of GDP. The permanent increase in private employment is about 270.000
persons equivalent to an increase in employment by 10%. Note that this is a
hypothetical number since it is not based on any explicit policy initiatives. Both
of these measures also imply a consolidation and are therefore also prefunding
or savings strategies.

5.3 Comparison of PAYG-solution and sustainable taxes

PAYG-financing stabilizes the debt ratio but implies a time-varying tax rate
with an upward trend, whereas the sustainable tax is constant, cf giure 6. Hence,
there is a substantive consolidation of public finances under the sustainable tax.
This reflectss the smoothing properties of the prefunding strategy. However, in
the present context the smoothing is primarily of an underlying upward trend in
the PAYG-tax rather than temporary variations around a more constant level.
countries.

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