Public expenditure risks

• Author: Peter S. Heller/David Hauner
• Position: IMF Fiscal Affairs Department
• Pages: 201-211

Page 201

In most industrial countries, projections of increased fiscal burdens have centered on aging populations. But age-related issues are not the only worry. Two new IMF studies argue that long-term expenditure projections are subject to considerable uncertainty. Governments, with limited scope to reduce nonage-related expenditures or raise already-high tax rates, should move soon to adopt a more ambitious fiscal policy stance that provides "space" to cope with increased demands.

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Aging, uncertainties argue for more ambitious fiscal policy

The challenge of addressing aging-related fiscal pressures looms large on the policy agendas of most industrial country governments. Yet the analysis of long-term expenditure trends has focused mainly on the implications of aging populations for government spending on pensions and health care. Two new IMF Working Papers shed light on a number of policy issues pertaining to long-term expenditure uncertainties that are relatively unexplored. They conclude that governments will have to adopt a more ambitious fiscal policy stance sooner rather than later to allow for gradual fiscal adjustment to aging and create space for potential additional expenditure risks.

Much has been written on the "fiscal time bomb" of agerelated spending on pensions and health, including longterm care, in industrial countries. For example, the European Commission suggests the need for a fiscal adjustment- in the form of up-front and sustained tax or expenditure adjustments-of 2-3 percent of GDP until 2050 in most countries to hold current debt ratios constant in the face of pressures related to aging populations. Yet two long-term expenditure uncertainties typically remain relatively unexplored: those associated with the assumptions underlying the projections, and those related to the potential to reduce spending on non-age-related expenditure.

Projections highly uncertain

In carrying out long-term budget sustainability projections, technocrats are often constrained in a number of ways. Policymakers may dictate that projections be based solely on legislation currently in force, thus incorporating policies that may, in fact, be unsustainable in the future. Such an approach may not appropriately account for underlying uncertainties and can...