Transcript How are long-term projections prepared?

Long-Term Budget Projections:
Can They Help Governments
Address The Ageing Problem?
Presentation by
Barry Anderson
At the
2006 Meeting of the
OECD Asia Senior Budget Officials Network
Bangkok, Thailand
December 14-15, 2006
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Outline
Goals of Presentation
 Why do long-term projections?
 How are long-term projections
prepared?
 How can long-term projections be
used?
 An example of the use of long-term
projections
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Goals of Presentation
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Increase your awareness of long-term budget
projections as a mechanism to assess fiscal
risks
Describe how long-term projections are made
Describe how long-term projections can be
used
Provide and discuss an example of their use
This presentation is based on OECD’s recent paper: “Assessing Fiscal
Risks Through Long-Term Budget Projections” by Paal Ulla, which was
presented at the 27th Annual Meeting of Senior Budget Officials held in
June 2006 in Sydney.
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Why Do Long-Term Projections?
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Addresses fiscal sustainability by identifying the longterm fiscal consequences of near-term political decisions
Promotes transparency by forcing the estimation of the
costs and consequences of policy actions
Better quantifies significant fiscal risks—and thus
helps plan for funding core functions—through use of
sensitivity analysis
Allows for analyses of contingent liabilities and the
potential costs of natural disasters
Most of all, unlike generational accounting & balance
sheet analysis, it is relatively easy to understand & use
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How are long-term projections
prepared?
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Demographics
Economics
Current policy baseline
– Spending
• Age related
• Other mandatory
• Discretionary
• Contingent liabilities
– Revenues
– Debt service
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Demographic Projections
The most important are:
– Life expectancy
– Fertility rates
– Net immigration
 But demographic factors usually don’t
change quickly, and immigration
changes have to be huge to have much
of an influence
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Economic Projections
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The most important are:
– Productivity
– Labour market participation
– Interest rates
As the future is unknowable, sensitivity
analysis is particularly valuable
Use of past trends as possible indicators of
the future can also be instructive
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Current Policy Baseline
A good starting point in that it permits
displaying the potential costs of
proposed legislation
 Assumes current policies/laws are in
place until/unless they expire under law
 The major exception to this unchanged
policy baseline is revenues—see below
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Age Related Spending
Public pensions
 Health
 Long-term care
 Education
 Unemployment
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Other Spending Categories
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Other mandatory
– Usually done as a percentage of GDP
Discretionary
– Usually done as a percentage of GDP
Contingent liabilities
– Credit, especially insurance & loan guarantees
– Government-owned enterprises
– Public-Private Partnerships
– Fiscal consequences of natural disasters
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Revenues
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The unchanged policy scenario can be
unrealistic here.
– Even if kept constant in real terms, real
growth over the long run would eventually
push the entire population to paying
income taxes at the highest marginal rate.
So, an option is to keep the overall tax rate
constant on household income.
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Debt Service
Base is determined by above
calculations
 Strongly influenced by interest
rates
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How can long-term
projections be used?
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Sensitivity analyses on, for example:
– Life expectancy
– Immigration rates
– Productivity growth
– Size if the labour force
– Pension reforms
– Health care expenditures
– Interest rates
– Medium-term objectives
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Examples of the Time Frames Covered
in Long-Term Projections
Projection
Time Frame Covered
Australia
40 years
Canada
10 years
Denmark
10 years
Germany
45 years
New Zealand
45 years
Norway
55 years
United Kingdom
50 years
United States
75 years
European Commission
45 years
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An Example of the Use of LongTerm Projections
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Based on a Special Policy Briefing before the Lisbon
Council on the “Sustainability of Public Finances”
by Joaquin Almunia, EC Commissioner for Economic
and Monetary Affairs, Brussels, October 9, 2006.
(http://www.lisboncouncil.net/index.php?option=com_content&ta
sk=view&id=32&Itemid=&lang=en)
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See also “The Long-Term Sustainability of Public
Finance in the European Union”, a report by the
European Commission Services, October, 2006.
(http://ec.europa.eu/economy_finance/publications/european_ec
onomy/2006/ee0406sustainability_en.htm)
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Population Pyramids for EU25
2004
2050
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Population Pyramid Summary for the UNITED STATES, 2004 & 2050
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Population Pyramid Summary for AUSTRALIA, 2004 & 2050
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Population Pyramid Summary for JAPAN, 2004 & 2050
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Population Pyramid Summary for THAILAND, 2004 & 2050
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Population Pyramid Summary for KOREA, 2004 & 2050
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Population Pyramid Summary for SINGAPORE, 2004 & 2050
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Population Pyramid Summary for INDIA, 2004 & 2050
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Population Pyramid Summary for CHINA, 2004 & 2050
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The EU Sustainability Gap* = 2¼% of GDP
(*the gap between the structural budgetary position in
2005 and the 60% reference value used by the EC)
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Impact of Changes in Assumptions on
the Sustainability Gap for the EU
Demographic & Economic Assumptions
Higher life expectancy, of which:
% of GDP
.5
-pensions
.2
-health care
.2
-long-term care
.1
Higher labour productivity
-.3
Higher employment of older workers
-.2
Higher employment if due to:
-an increase in the labour supply
-.1
-a decrease in the NAIRU
-.3
Higher interest rates
.2
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Employment Rates Projected to
Increase in the EU
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The Cost of Delay in Implementing
Structural Government Balance by 2010
Selected Countries
% of GDP
Portugal
1.4
Hungary
1.3
Germany
.7
Italy
.7
Luxembourg
.7
France
.6
Greece
.6
United Kingdom
.6
Czech Republic
.4
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Average Exit Age from the Labour
Market in 2004
Luxembourg
57.7
Italy
61.0
Poland
57.7
Netherlands
61.1
Slovak Republic
58.5
Germany
61.3
Austria
59.2
Denmark
62.1
France
58.9
United Kingdom
62.1
Belgium
59.4
Portugal
62.2
Greece
59.5
Spain
62.2
Czech Republic
60.0
Ireland
62.8
Finland
60.5
Sweden
62.8
Hungary
60.5
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The Benefits of Implementing Balance
Budgets (MTO Scenario) by 2010
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Commissioner Almunia’s 3-pronged
Strategy to Ensure Sustainability
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Commissioner Almunia’s Conclusions
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“The status quo is not sustainable and therefore not an option.”
More movement towards structural balance in needed.
“Growth potential needs to be improved by raising productivity and
employment and this means that Europe’s social models have to be
adapted.”
“Structural reforms, notably in pensions, should improve government
finances over the long-term and make Europe’s social models more
sustainable.”
“Implementing the Lisbon strategy by fostering productivity,
employment creation and adaptability of the economies is paramount,
as it is the best way to increase economic growth and prosperity and
contributes to fiscal sustainability.”
The “challenge is considerable, but manageable.” This is supported
by the progress towards sustainability made by countries who have cut
deficits and reformed pension systems.
“Our future is in our hands.”
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My Observations
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There are no easy answers.
– Higher growth alone is not sufficient.
– Higher productivity alone is not sufficient.
– Higher population or labour force growth alone is not
sufficient—and mechanisms to induce greater labour force
participation are not cheap or easy.
Higher taxes and/or higher debt can have serious detrimental
effects.
Thus, benefit cuts must be part of a solution.
The sooner a country begins, the easier it will be. For example,
the best way to prevent firing public employees in the future is
not to hire them today.
Incorporating long-term projections into the annual budget
process is worthwhile.
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