OECD Economics Department Working Papers

ISSN :: 1815-1973 (online)
DOI :: 10.1787/18151973

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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations

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Authors:

Rossana Merola¹, Douglas Sutherland

Author Affiliations

1: OECD, France

Publication Date

10 Jan 2012

Bibliographic information

No.:: 934

Pages

DOI

10.1787/5k9h28p42pf1-en

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During the economic and financial crisis, fiscal positions across the OECD countries deteriorated sharply. This raises the question of what level of primary deficit would ensure long-term sustainability and what degree of consolidation is needed. The purpose of this paper is to gauge the scale of fiscal consolidation that will be needed to ensure long-term sustainability. The analysis uses so-called fiscal gaps to provide a simple metric for how much consolidation is needed under a series of different assumptions and scenarios. The aim is to highlight the scale of the problems, how they differ across countries and the uncertainties surrounding the estimates. A first set of results suggest that lower debt targets provide greater room for manoeuvre to react to shocks in the future. A second set of results shows that growth-enhancing structural reforms | especially reforms of pension systems | can mitigate budget pressures resulting from ageing populations and hence contribute to fiscal consolidation. Furthermore, raising efficiency in the provision of health care and education can reduce budgetary pressures. Finally, achieving debt objectives under shocks to interest rates or to government spending would require additional tightening in most of the OECD countries.

Keywords:: fiscal consolidation, ageing populations, public social expenditure, long-term projections, long-term public finance sustainability

JEL Classification:

E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy
H50: Public Economics / National Government Expenditures and Related Policies / General
H68: Public Economics / National Budget, Deficit, and Debt / Forecasts of Budgets, Deficits, and Debt
J11: Labor and Demographic Economics / Demographic Economics / Demographic Trends, Macroeconomic Effects, and Forecasts