Brussels, 18 December 2012
Ensuring sound public finances: Fiscal Sustainability Report 2012
What is the Fiscal Sustainability Report?
The Fiscal Sustainability Report 2012 is a study produced by the services of the European Commission. The report analyses the sustainability of public finances in the Member States, looking in particular at the impact of the financial, economic and fiscal crisis and of demographic ageing, as estimated in the 2012 Ageing Report1. Following the publication of the previous Fiscal Sustainability Report in 2009, the Council of Ministers on 10 November 2009 requested that the Commission produce a new report based on updated long-term budgetary projections, incorporating the implications of ageing populations.
Which key challenges does the Fiscal Sustainability Report 2012 identify?
The deterioration in fiscal positions and increases in government debt since 2008, together with the projected demographic transition due to an ageing population, compound each other and make fiscal sustainability an acute policy challenge. Analysing risks to fiscal sustainability is therefore crucial at the current juncture. Both euro-area countries and the EU as a whole must be able to formulate appropriate policy responses and restore credibility and confidence. As developments in the recent past have confirmed, fiscal sustainability challenges are not only of a longer-term nature: in particular, the sovereign debt crisis has led to some Member States facing difficulties in accessing the market. The report therefore describes a multidimensional approach for assessing fiscal sustainability, based on short-, medium- and long-term challenges:
Short-term challenges are identified through a combination of fiscal, macro-financial and competitiveness indicators aiming at an 'early detection of fiscal stress' (S0 indicator). Short-term risks of fiscal stress have abated in nearly all countries in the last few years. In 2009, almost two thirds of the EU countries were above the critical threshold, indicating elevated risks of fiscal stress for 2010. Since then, short-term risks have been progressively reduced, as the 'S0 indicator' shows.
Medium-term challenges are linked to the excess of projected age-related expenditure – notably on pensions, healthcare and long-term care – over projected revenue, together with any gap with respect to the primary balance needed to bring the debt-to-GDP ratio to 60% of GDP by 2030. This is the 'debt compliance risk' (S1 indicator).
In a medium to long-term perspective, an additional 4¾ percentage points of GDP in fiscal consolidation in structural terms is needed in the EU as a whole to reduce public debt to the 60% of GDP threshold by 2030, as illustrated by the S1 indicator. According to the Commission services’ autumn 2012 economic forecasts2, a fiscal tightening of 3 percentage points of GDP in structural terms is already expected up to 2014. This implies an additional effort of 1¾ percentage points of GDP, comprising further fiscal consolidation and structural reform, after 2014 to reach the 60% threshold by 2030. The situation is however quite different across the Member States, depending on their budgetary position, debt level and the extent to which age-related expenditure weighs on the public finances in the coming two decades.
In terms of debt projections, unless fiscal and structural policies are adjusted further, debt in the EU will remain high in the coming decade. As the fiscal pressures from an ageing population increase around the mid-2020s, debt will start to rise further. However, determined action to improve fiscal positions further in a gradual and steadfast manner and attainment by Member States of their medium-term budgetary objectives would put EU government debt on a clear downward path, falling below 60% by 2030. Strict adherence to the EU fiscal rules is therefore necessary to ensure sustainable debt levels.
Long-term challenges are also linked to the excess of projected age-related expenditure – specifically on pensions, healthcare and long-term care – over projected revenue, as well as any gap with respect to the primary balance needed to ensure that the debt-to-GDP ratio is not on an ever-increasing path. These are the 'ageing-induced fiscal risks' (S2 indicator).
In the very long term, fiscal sustainability challenges influenced by population ageing remain significant in most countries, as illustrated by the S2 indicator. This reveals that additional policy adjustment is necessary. Several Member States have reformed their pension systems and set them on a more sustainable footing, a process that needs to be set in motion in all countries.
Are country-specific challenges detailed?
The report provides extensive country-specific analysis of fiscal sustainability challenges. It addresses all Member States except for those under a full economic adjustment programme, since their fiscal sustainability is assessed in detail in that context. The fiscal sustainability risks are not the same for every country. Risks in some countries are primarily of a short- to medium-term nature, while for others they are of a long-term nature, reflecting a need to address long-term age-related public spending trends, notably on pensions, healthcare and long-term care. The appropriate combination of policies will depend on the main reasons behind the sustainability challenges the different Member States are facing.