Article [ Article 2008030702 - 07/03/2008]

Budget surpluses to face population ageing: the reality and the prospects

Since 2000, the resources released by decreasing interest charges have been used to compensate for structural cuts in revenue and increases in expenditure. As a consequence, those resources have not been saved up to finance the future cost of ageing. The strategy that has been recommended for several years by the High Council of Finance (HCF) and that is supported by a broad social and political consensus is thus not applied. The principle underlying this strategy consists in pre-financing the ageing cost by saving up the margins resulting from reductions in public debt.

Estimating private health expenditures within a dynamic consumption allocation model Budget surpluses to face population ageing: the reality and the prospects 20 RECENT PUBLICATIONS Implementing the HCF’s strategy would imply a U-turn in budgetary policy, which has been rather loose over the last years. But a restrictive policy may not be easy to carry out because of political goals and concerns: pressures to cut taxes in the context of globalization, the cost of employment policies, pressures from the social partners to increase social expenditure, and others.

In order to face the consequences of ageing, international organizations usually recommend a three-pronged strategy focused not only on public debt (pre-financing strategy), but also on age-related expenses (reform of the social benefits system) and on employment (structural reform of the labour market). By overlooking a pre-financing strategy, either wholly or partially, the authorities will inevitably be led to reconsider the trade-off between the three prongs of the strategy.

This Working Paper makes a diagnosis of the sustainability of public finances on the basis of the long-term projections (given the same policy scenario) carried out by the Federal Planning Bureau (FPB). It also calculates the effort needed to be done required to implement the budget trajectory that was recommended by the HCF in March 2007. It assesses to what extent the budgetary adjustment, which is necessary in the short run for a pre-financing strategy, could be reduced if future generations are to finance the non-demographic increase in health care expenses. Moreover, it measures the scale of the reforms that should be carried out to reduce the cost of ageing so that budgetary sustainability is guaranteed in the absence of the budget surpluses recommended bythe High Council of Finance. The study also contains a sensitivity analysis of the sustainability diagnosis, checking its sensitivity to productivity, employment and the parameters of social policy. Finally, the study describes the evolution of the sustainability diagnosis in the light of the successive long-term projections that the FPB has published since the early 90’s.