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

OECD Economics Department Working Papers No. 934

42 Pages Posted: 16 Jan 2012

See all articles by Rossana Merola

Rossana Merola

International Labour Organization (ILO)

Douglas Sutherland

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Date Written: January 16, 2012

Abstract

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 aging 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, H50, H68, J11

Suggested Citation

Merola, Rossana and Sutherland, Douglas, Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations (January 16, 2012). OECD Economics Department Working Papers No. 934, Available at SSRN: https://ssrn.com/abstract=1985999 or http://dx.doi.org/10.2139/ssrn.1985999

Rossana Merola

International Labour Organization (ILO) ( email )

Route des Morillons 4
Geneva, 1211
Switzerland

Douglas Sutherland (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

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