This section presents the sustainability gaps, calculated on the basis of the information provided in the SCPs according to the commonly agreed methodology and the projected change in age-related expenditure in the period to 2050.
4.3.1. Background
The S2 indicator is defined as the change in the current level of the structural primary balance required to make sure that the discounted value of future structural primary balances (including the path of property income) covers the current level of debt. It is decomposed into two elements. The first is termed 'initial budgetary position' (IBP). The IBP would take the value zero if the structural primary balance in the
starting year – and maintained at this level over time – would be just sufficient to keep the debt- to-GDP ratio at its level of the starting year over the long term. It is assumed that at current policies non-age-related revenues and primary expenditure are to remain unchanged. Therefore, a positive value of the IBP indicates by how much the structural primary balance would have to rise from its current level and with immediate effect so as to keep the debt ratio unchanged. The second element of the S2 indicator is the 'long- term cost of ageing' (LTC). LTC measures by how much the primary balance would have to further rise (fall) to finance the projected increase (reduction) in age-related expenditure. The S1 indicator is defined similarly, with the difference that it does not require the debt ratio to remain unchanged but to reach 60% of GDP by 2050 instead.
Therefore, in comparison with S2, a third element, the 'debt requirement' (DR) enters the decomposition, which increases the gap vis-à-vis the current level of the structural primary balance if the initial level of debt is above 60% of GDP and decreases it otherwise. If the budgetary impact of ageing is increasing over time, the discounted budgetary cost of ageing (LTC) will be less for S1 than for S2, since S2 is defined over an infinite horizon and therefore gives relatively more weight than S1 to ageing costs arising in the later part of the 2010-2050 period. Countries may therefore decide to address population ageing by reducing its long-term budgetary impact (low LTC) and/or by 'frontloading' this cost through a negative IBP.
4.3.2. The current policy scenario
Table reveals that in the EU and in the euro area, the sustainability gap is about 1% of GDP according to the S1 indicator and up to 2½% of GDP according to the S2 indicator. Compared with the previous round of SCP assessments, this is a remarkable improvement; the sustainability position has improved by about ½ to 1% of GDP, reflecting the improved structural fiscal positions in 2007.
Table I.3.1 in Section I.3 provides an overview over the 2007 debt-to-GDP ratio and the structural (primary) budget balances based on the
information provided in the 2006/07 and 2007/08 vintages of the SCPs. In general, most countries improved their underlying fiscal position in 2007.
Section I.3.5 highlights two risks regarding the achieved structural consolidation. The first concerns the possible overestimation of current structural balances. A slowdown in real GDP growth for this and next year (compared with the projections made in the SCPs) might result in a downward revision of potential growth estimates also for the recent past. This would imply that the recent budgetary consolidation would have a cyclical component than currently estimated. The second risk relates to the crucial assumption underlying the sustainability gaps, namely that current policies are to be maintained ad infinitum, in order to reflect a no-policy-change scenario. Over the long term, changes in the structural primary balance are supposed to be the consequence of discretionary policy choices. However, in the short term, this may not be the case. Especially in 2006 and 2007, in many Member States tax revenues have exceeded what would have been normally expected on the basis of the agreed common method used to calculate the cyclical adjustment of the budget balance. Countries with such unexpected buoyant tax revenues that have carried out their expenditure larger plans, i.e. that did not change their expenditure policy, therefore experienced an improvement in their structural budget balance. It cannot be excluded that such unexpected positive tax developments could reverse if GDP growth slows down. In order to maintain the structural position reached after a positive revenue surprise, the government might in that case need discretionary action to consolidate. While respecting their medium-term budgetary objective (MTO), the structural primary balance deteriorated particularly steeply in Ireland and
the Netherlands (1). According to the SCPs,
somewhat smaller deteriorations occurred in Bulgaria, the Czech Republic, Estonia, Romania and the UK (2).
(1) However, actual data released after the assessment of the
Dutch programme indicate that the budgetary outcome in 2007 was 0.8% of GDP better than projected in the programme. The structural balance deteriorated in 2007 nonetheless.
(2) Except for Romania, this was not confirmed by the
Commission services' spring 2008 forecast.
In spite of the improvements in the underlying budgetary positions in most countries, the long- term budgetary impact of ageing remains the main factor behind the sustainability gaps. The EU aggregate however masks considerable variety across Member States.
A majority of Member States presents sustainability gaps: 16 according to the S1 indicator and 19 according to the S2 indicator (same numbers as in 2006). This implies that based on the current budgetary position and with no changes in policies, further fiscal adjustment Table I.4.2:
S1 S1 in 2006 S2 S2 in 2006
Total IBP (1) DR (1) LTC (1) Total Total IBP (1) LTC (1) Total
BE 1.6 -2.5 0.3 3.8 1.3 3.0 -2.4 5.4 2.7 BG (2) -6.0 -4.0 -0.8 -1.2 -6.5 -4.5 -3.9 -0.7 -5.2 CZ 5.6 3.5 -0.5 2.6 5.2 8.5 3.7 4.8 8.0 DK -3.7 -4.3 -0.9 1.4 -1.4 -2.6 -3.9 1.3 0.3 DE 0.5 -1.4 0.0 2.0 2.2 1.8 -1.3 3.1 3.3 EE -3.6 -1.2 -1.1 -1.3 -4.2 -2.6 -1.1 -1.4 -3.2 IE 1.3 -1.2 -0.9 3.5 -1.2 4.9 -1.1 6.0 2.4 EL (2) 1.2 0.4 0.5 0.4 1.2 1.4 0.5 0.9 1.3 ES -0.3 -3.3 -0.5 3.5 -0.2 2.7 -3.2 5.9 2.8 FR 2.2 0.3 0.0 1.9 2.3 3.0 0.4 2.6 3.2 IT 1.3 -0.9 0.7 1.5 3.4 1.1 -0.8 2.0 3.0 CY -0.9 -4.7 -0.6 4.4 2.3 4.1 -4.4 8.5 7.0 LV 0.2 0.2 -0.9 0.9 -0.1 1.5 0.3 1.2 1.2 LT 0.5 0.6 -0.8 0.7 1.0 2.0 0.7 1.3 2.4 LU 3.1 -0.5 -1.6 5.2 4.3 8.1 -0.2 8.3 9.3 HU 4.7 1.7 0.2 2.8 10.5 6.9 2.0 4.9 12.3 MT -0.2 -0.8 -0.1 0.6 0.4 -0.6 -0.5 -0.1 -0.1 NL 2.2 -0.8 -0.3 3.3 0.8 3.9 -0.5 4.4 2.4 AT -0.1 -1.0 -0.1 1.0 -0.2 0.3 -0.8 1.1 -0.1 PL -1.7 1.1 -0.3 -2.5 -1.6 -1.3 1.5 -2.8 -1.4 PT 1.9 0.2 0.0 1.7 5.6 3.6 0.4 3.2 8.3 RO (2) 1.5 2.7 -0.8 -0.5 1.7 1.9 2.7 -0.8 1.9 SI 3.5 -0.2 -0.7 4.4 3.6 7.0 0.0 7.1 7.0 SK 2.6 2.0 -0.5 1.1 2.4 4.4 2.2 2.1 4.1 FI -3.1 -4.9 -1.5 3.3 -3.1 -0.5 -4.6 4.2 -0.7 SE -3.1 -3.5 -1.0 1.5 -3.1 -1.2 -3.2 2.0 -1.5 UK 3.3 1.5 -0.2 2.0 2.6 4.8 1.6 3.2 4.2 Euro area (2) 1.0 -1.2 0.0 2.3 1.9 2.3 -1.1 3.4 3.0 EU (2) 1.2 -0.7 -0.1 2.1 1.8 2.5 -0.6 3.1 3.0
Source: Commission services.
Results of the sustainability gap calculations in the '2007 scenario' (% of GDP)
Notes:
(2) No commonly agreed pension projections were available for Greece and the rise in age-related expenditure is therefore underestimated. Pension expenditure was projected to rise between 2005 and 2050 by 10.2% in the 2002 update of the Greek stability programme. The aggregate results for the euro area exclude Greece and for the European Union additionally exclude Bulgaria and Romania, for which also no commonly agreed projections exist.
(1) IBP = the initial budgetary position, DR = the debt requirement in 2050 (if the current debt/GDP ratio is below 60% of GDP debt is allowed to rise and this component reduces the sustainability gap as measured by the S1 indicator, and vice versa.), LT C = the long-term changes in the primary balance.
remains necessary so as to render public finances sustainable over the long term for most Member States. In more than half of the Member States, a sizeable adjustment, of more than 2% of GDP, would be required, with the gaps reaching about 7% of GDP in the case of Hungary and Slovenia and even exceeding 8% of GDP for the Czech Republic and Luxemburg.
According to data in the updated SCPs, 12 Member States strictly respected their MTOs in 2007 (1). Of these, Bulgaria, Denmark, Estonia,
Finland and Sweden have a sustainability gap smaller than zero for both indicators, suggesting that based on the commonly agreed projections the current budgetary position, if maintained, would be more than sufficient to ensure sustainability as defined by the indicators (2).
Thanks to reformed pension systems, the budgetary cost of ageing in these countries is below the EU average, except for Finland, where the budgetary impact of ageing is around the EU- average but the degree of frontloading relatively high. Denmark, Finland and Sweden's budgetary positions in 2007 had considerably improved compared with 2006.
Furthermore, among the countries at the MTO, Cyprus, Latvia and Spain would have a sustainability gap below or close to zero according to S1. Except for Cyprus, these countries have a low or even very low current debt ratio. According to S1, such low current debt would allow for some budgetary leeway (negative DR) to finance some of the cost of ageing permanently by additional debt. For Latvia, the cost of ageing is also far below the EU-average. By contrast, in Cyprus, Ireland and Spain, the cost of ageing is relatively high, implying that, while the projected rise in age- related expenditure is relatively distant in time, a pension reform would be needed at some point. Cyprus is a special case. With debt at 60% of GDP in 2007, the high budgetary impact of ageing becomes more significant in the second half of the 2010-2050 period. However, Cyprus
(1) This is confirmed by the Commission services' spring
2008 forecast with the exception of Latvia, whose structural balance amounted to -1.4% of GDP in 2007 (contrary to -0.5% according to the SCP).
(2) For Bulgaria on the basis of national projections;
commonly agreed long-term projections do not yet exist.
considerably improved its budgetary position in 2007 on the year before. The exceptionally strong structural primary balance achieved in 2007, if maintained, would allow more than offsetting the impact of ageing for some time before the debt ratio returns to 60% of GDP. The remaining three countries strictly at the MTO, Luxemburg, the Netherlands and Slovenia, have sustainability gaps according to both definitions. If kept permanently, the budgetary position in the starting year (before population ageing will impact on the budget) is more than sufficient to stabilise the current debt ratio for these countries. However, the budgetary cost of ageing is among the highest in the EU in Luxemburg and Slovenia, and above the EU average in the Netherlands.
On the back of the budgetary consolidation achieved in 2007, Germany has broadly reached its MTO. The primary surplus would be sufficient to stabilise the debt ratio, but still not enough to cover the long-term cost of ageing, which is around the EU average.
Although being somewhat away from its MTO, the sustainability indicators for Austria are smaller than zero, since the initial budgetary position would be more than sufficient to cover initial debt and the cost of ageing below the EU average. Also not far from its MTO, Lithuania has a small sustainability gap, but a very low debt ratio, which would call for a slightly higher primary surplus than the current one for it to remain constant over time. However, the future cost of ageing is also far below the EU average. Belgium, the Czech Republic, Greece, France, Italy, Hungary, Portugal, Romania and Slovakia are quite away from their MTOs. For Belgium and Italy, the structural primary balance in 2007 would be, if maintained, more than sufficient to stabilise the debt ratio at its 2007 level, but not to offset the additional cost of ageing.
For France and Portugal, and even more so for Slovakia, the initial budgetary position is not quite sufficient to stabilise the current debt ratio, while the budgetary impact of ageing is below or about the EU average. For Poland, the initial budgetary position is also not sufficient to stabilise the current debt ratio. However, the
pension reform implemented should gradually provide budgetary relief.
The Czech Republic and Hungary are projected to experience ageing cost above average, while current policies would not stabilise the debt ratio. The same applies for Greece. Since commonly agreed pension and long-term projections do not exist, the above indicators are based on the commonly agreed other age-related budgetary items (health care, education, unemployment). National projections, as quoted in the recent updated stability programme and dating from 2002, point to an increase of pension expenditure of more than 10 pp of GDP up to 2050. For illustration, the sustainability indicators can be recalculated taking the national projections at
face value: a considerable sustainability gap would emerge (S2 at 8.7% of GDP).
4.3.3. Achieving the plans in the
programmes
The sustainability gap according to S2 for the EU would be halved if Member States reached the budgetary targets planned in the 2007 updates of the stability and convergence programmes. The gap according to S1 would even be eliminated. The impact on the sustainability indicators of implementing the updated programmes' plans are given in Table . The planned consolidation in Cyprus, France, Italy and Lithuania would result in a reduction of the respective S2 sustainability gaps by 2% of GDP or more.
Table I.4.3:
S1 S1 in 2006 S2 S2 in 2006
Total IBP (1) DR (1) LTC (1)
Total Total IBP (1) LTC (1)
Total BE 0.4 -3.7 0.2 3.8 1.0 1.8 -3.6 5.4 2.4 BG (2) -6.0 -4.0 -0.8 -1.2 -4.6 -4.5 -3.9 -0.7 -3.5 CZ 3.8 1.8 -0.5 2.6 4.3 6.8 2.0 4.8 7.1 DK -2.1 -2.7 -0.8 1.4 -0.9 -1.1 -2.4 1.3 0.8 DE -0.4 -2.3 0.0 2.0 0.7 0.9 -2.2 3.1 1.8 EE -3.5 -1.1 -1.1 -1.3 -4.4 -2.5 -1.0 -1.4 -3.4 IE 2.5 -0.1 -0.9 3.5 0.0 6.1 0.1 6.0 3.6 EL (2) -1.1 -1.9 0.4 0.4 0.1 -0.9 -1.7 0.9 0.1 ES 0.2 -2.8 -0.5 3.5 0.4 3.3 -2.7 5.9 3.3 FR 0.1 -1.7 -0.1 1.9 -0.5 1.1 -1.6 2.6 0.6 IT -1.2 -.3.3 0.6 1.5 -1.4 -1.3 -3.2 2.0 -1.5 CY 1.5 -2.5 -0.4 4.4 1.5 6.3 -2.1 8.5 6.2 LV -2.0 -1.9 -1.0 0.9 -1.1 -0.7 -1.9 1.2 0.2 LT -1.7 -1.5 -0.8 0.7 -1.4 -0.1 -1.4 1.3 0.1 LU 2.0 -1.5 -1.7 5.2 2.0 7.1 -1.2 8.3 7.1 HU 2.7 -0.2 0.0 2.8 3.0 5.0 0.1 4.9 5.2 MT -2.1 -2.6 -0.1 0.6 -1.6 -2.4 -2.3 -0.1 -2.0 NL 1.0 -1.9 -0.4 3.3 1.2 2.8 -1.7 4.4 2.7 AT -0.6 -1.5 -0.1 1.0 -1.3 -0.3 -1.3 1.1 -1.1 PL -3.2 -0.4 -0.3 -2.5 -2.8 -2.8 0.0 -2.8 -2.6 PT 0.2 -1.4 -0.1 1.7 2.5 2.0 -1.2 3.2 5.3 RO (2) 0.8 2.1 -0.8 -0.5 0.9 1.3 2.1 -0.8 1.3 SI 3.0 -0.7 -0.7 4.4 3.7 6.5 -0.5 7.1 7.2 SK 0.9 0.4 -0.5 1.1 1.5 2.7 0.6 2.1 3.2 FI -1.3 -3.2 -1.4 3.3 -2.6 1.3 -2.8 4.2 -0.2 SE -3.7 -4.1 -1.1 1.5 -3.0 -1.8 -3.8 2.0 -1.4 UK 1.7 0.0 -0.3 2.0 1.4 3.4 0.1 3.2 3.0 Euro area (2) -0.2 -2.3 -0.1 2.3 0.0 1.1 -2.2 3.4 1.2 EU (2) 0.0 -1.9 -0.2 2.1 0.1 1.4 -1.7 3.1 1.4
Results of the sustainability gap calculations in the 'programme scenario' (% of GDP)
Notes:
(2) No commonly agreed pension projections were available for Greece and the rise in age-related expenditure is therefore underestimated. Pension expenditure
was projected to rise between 2005 and 2050 by 10.2% in the 2002 update of the Greek stability programme. The aggregate results for the euro area exclude Greece and for the European Union additionally exclude Bulgaria and Romania, for which also no commonly agreed projections exist.
Source: Commission services.
(1) IBP = the initial budgetary position, DR = the debt requirement in 2050 (if the current debt/GDP ratio is below 60% of GDP debt is allowed to rise and this
However, compared with previous year's assessment, the sustainability gap according to the programme scenario remains unchanged, despite the more favourable structural position in 2007. The recent updates of SCPs display a relative lack of ambition in the ex ante adjustment. Moreover, the achieved consolidation was helped by buoyant tax revenues. As discussed earlier, the observed narrowing of the sustainability gaps in the last
two SCP assessments compared with the Sustainability Report may therefore not be permanent.
4.3.4. Debt developments
Given the improved structural budgetary position in 2007, the debt-to-GDP ratio in the EU has fallen below the 60 % reference value in 2007. In the ‘2007’ scenario it is projected to exceed 60% Table I.4.4: Gross debt 2007 2010 2030 2050 2010 2030 2050 BE 84.9 76 60 145 75 31 80 BG (1) 19.8 17 -97 -269 17 -97 -269 CZ 30.4 34 116 386 30 76 282 DK 25.6 15 -64 -131 19 -26 -49 DE 64.9 59 43 89 60 22 38 EE 2.7 2 -43 -129 2 -41 -123 IE 25.1 26 33 139 29 58 198 EL (1) 93.4 87 90 136 83 33 -7 ES 36.2 29 -27 41 30 -14 75 FR 64.2 64 88 173 62 43 70 IT 105.0 101 86 133 99 28 -9 CY 60.0 39 -31 20 44 18 130 LV 9.4 10 18 69 6 -29 -52 LT 17.6 18 27 88 14 -20 -32 LU 6.9 8 47 197 7 26 155 HU 65.4 68 113 312 63 70 205 MT 62.9 57 57 49 53 17 -41 NL 46.8 44 63 173 41 34 112 AT 59.9 56 37 57 55 24 25 PL 44.9 44 10 -36 42 -20 -117 PT 64.4 63 70 168 60 33 74 RO (1) 11.9 15 72 139 15 58 105 SI 25.6 23 56 255 23 45 227 SK 30.6 31 66 212 30 32 116 FI 35.3 26 -45 -61 29 -2 36 SE 39.7 25 -43 -75 25 -57 -105 UK 43.9 47 92 223 45 59 147 Euro area (2) 65.9 62 52 116 61 25 52 EU (2) 59.3 56 54 125 55 27 61
(2) The aggregate results for the euro area exclude Greece and for the European Union additionally exclude Bulgaria and Romania.
Source: Stability and convergence programmes, Commission services.
Projected debt developments in the EU Member States (% of GDP)
Notes:
'2007' scenario Programme' scenario
(1) No commonly agreed pension projections were available for Greece and the rise in age-related expenditure is therefore underestimated. Pension expenditure was projected to rise between 2005 and 2050 by 10.2% in the 2002 update of the Greek stability programme. No commonly agreed long-term projections for Bulgaria and Romania exist.
after 2030, rising to almost 130% by 2050. If the plans in the updated SCPs were achieved, the debt ratio would remain below 60% for almost the entire projection period (see Table ).