Communication from the Commission to the Council and the European Parliament - The long-term sustainability of public finances in the EU {SEC(2006) 1247}
Date: 2006-10-12
Institutions: European Commission
Subjects: EU Member State, gross domestic product, national budget, pension scheme, population ageing, public debt, public finance

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.10.2006 
COM(2006) 574 final 

COMMUNICATION FROM THE COMMISSION  
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

The long-term sustainability of public finances in the EU 

{SEC(2006) 1247} 

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COMMUNICATION FROM THE COMMISSION  
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

The long-term sustainability of public finances in the EU 

1. 

LONG-TERM 
SURVEILLANCE AT THE EU LEVEL  

SUSTAINABILITY  OF 

PUBLIC 

FINANCES  AND  BUDGETARY 

In  the  coming  decades,  the  size  and  age-structure  of  Europe's  population  will  undergo 
dramatic  changes  due  to  low  fertility  rates,  continuous  increases  in  life  expectancy  and  the 
retirement  of  the  baby-boom  generation.  Ageing  populations  will  pose  major  economic, 
budgetary  and  social  challenges.  It  is  expected  to  have  a  significant  impact  on  growth  and 
lead  to  significant  pressures  to  increase  public  spending1.  This  will  make  it  difficult  for 
Member States to maintain sound and sustainable public finances in the long-term. This is of 
particular  importance  in  Economic  and  Monetary  Union,  as  high  deficits  and  rising  debt  in 
some  countries  leading  to  unsustainable  public  finances  might  have  an  adverse  impact  on 
macro-economic conditions for other EMU countries. Therefore, ensuring fiscal sustainability 
requires time-consistent policies, which involves addressing budgetary imbalances before the 
budgetary impact of ageing sets in. 

Successive European Councils have recognised the need to address the implications of ageing 
populations  at  European  level.  In  particular,  the  Stockholm  European  Council  decided  in 
March 2001 that ‘the Council should regularly review the long-term sustainability of public 
finance,  including  the  expected  strains  caused  by  the  demographic  changes  ahead’.  In  the 
renewed EU Sustainable Development Strategy, the June 2006 European Council stressed the 
important  challenge  to  public  finance  of  an  ageing  population  and  proposed  continued  EU 
support  to  the  efforts  by  Member  States  to  modernise  social  protection  systems  and  ensure 
their sustainability. Following the indications of the European Council, the Commission and 
the Council now examine the long-term sustainability of public finance as part of the regular 
multilateral  budgetary  surveillance,  reflecting  the  increased  emphasis  on  the  link  between 
medium-term budgetary strategies and long-term fiscal sustainability issues.  

Indeed,  the  ECOFIN  Council  stressed  in  its  report  of  20  March  2005  on  the  reform  of  the 
Stability  and  Growth  Pact  (SGP)  that  in  the  surveillance  of  budgetary  positions,  sufficient 
attention  should  be  given  to  debt  and  sustainability  so  as  to  safeguard  the  sustainability  of 
public  finances  in  the  long  run,  and  that  the  link  between  long-term  sustainability  concerns 
and medium-term budgetary planning needs to be strengthened. 

In 2003, the ECOFIN Council gave a mandate to the Economic Policy Committee to present a 
new  set  of  age-related  public  expenditure  projections  based  on  a  new  population  projection 
provided by Eurostat and agreed assumptions on key economic variables for all 25 Member 

1 

See  Economic  Policy  Committee  and  European  Commission  (DG  ECFIN),  (2006),  ‘The  impact  of  ageing  on 
public expenditure: projections for the EU-25 Member States on pensions, health-care, long-term care, education 
and unemployment transfers (2004-2050)’, European Economy, Special Reports No 1, 2006. 

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States covering pensions, health care, long-term care, education and unemployment transfers2. 
These  projections  were  completed  in  February  2006  and  were  prepared  together  by  the 
Commission (DG ECFIN) and the Member States within the Ageing Working Group of the 
Economic Policy Committee (EPC). They provide a comparable, transparent and robust basis 
for  assessing  the  budgetary  implications  of  demographic  change  and  the  sustainability  of 
public finances across Member States.  

The report, including the projections, was endorsed by the ECOFIN Council of 14 February 
2006 as the basis for assessing the sustainability of public finances in the context of the SGP. 
The Council also considered this report as an input in ongoing debates on the modernisation 
of welfare systems and extending working lives as a follow-up to the Hampton Court Summit 
of October 2005, the Lisbon strategy, the renewed EU Sustainable Development Strategy and 
the  Open  Method  of  Coordination  on  pensions.  Moreover,  in  its  conclusions,  the  Council 
invited  the  Commission  to  undertake  a  comprehensive  assessment  of  the  sustainability  of 
public  finances  in  the  Member  States  by  the  end  of  2006.  The  report  attached  to  this 
Communication responds to this invitation. 

2. 

THE  EU  APPROACH  TO  ASSESS  THE  LONG-TERM  SUSTAINABILITY  OF  PUBLIC 
FINANCES 

The  assessment  of  long-term  sustainability  of  public  finances  is  part  of  the  regular  EU 
budgetary  surveillance.  It  is  based  on  the  long-term  age-related  government  expenditure 
projections  and  on  the  budgetary  strategies  presented  in  the  Stability  and  Convergence 
Programmes.  In  this  context,  consistency  between  short  to  medium-term  budgetary  targets 
and long-term sustainability is at the core of the analysis. 

The issue of long-term sustainability is a multi-faceted one. It involves avoiding imposing an 
excessive  burden  on  future  generations  and  ensuring  the  country's  capacity  to  appropriately 
adjust  budgetary  policy  in  the  medium  and  long  run.  In  order  to  analyse  whether,  based  on 
current  policies  and  in  view  of  the  significant  budgetary  challenge  posed  by  ageing 
populations, the government finances are on a sustainable path or not, a long-term perspective 
of government commitments is necessary. For this purpose, the results of the common long-
term  age-related  expenditure  projections  under  current  policies  and  the  current  budgetary 
position are the key inputs to the analysis of the sustainability of public finances.  

The  new  projections  provide  a  comparable,  transparent  and  robust  basis  for  assessing  the 
budgetary implications of demographic change and the sustainability of public finances across 
Member  States.  Overall,  the  projections  show  that  the  EU  faces  a  significant  budgetary 
challenge posed by population ageing. Most of the projected increase in public spending will 
be  on  pensions  and,  to  a  lesser  degree,  in  health  care  and  long-term  care.  The  potential 
offsetting  savings  in  terms  of  projected  public  spending  on  education  and  unemployment 
benefits are likely to be limited3. In the EU age-related expenditure is projected to increase by 
about 4% of GDP up to 2050, although this hides very different developments in the Member 

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The  long-term  budgetary  projections  are  made  on  a  'no-policy  change'  basis  and  do  not  include  the  effects  of 
additional  policies  that  could  strengthen  e.g.  economic  growth  and  have  a  beneficial  impact  on  the  budgetary 
projections. 
The  projected  budgetary  savings  on  education  expenditure  are  made  on  current  policies.  In  line  with  the  Lisbon 
commitments to build a knowledge-based economy, such savings could be reallocated to educational areas which 
yield high socio-economic and fiscal returns, in line with the conclusions of the Spring 2006 European Council. 

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States; ranging from an increase of 7% of GDP or more in ES, IE, LU, PT, CY, CZ, HU and 
SI to a decrease as a share of GDP in EE, LV and PL4. 

Based on the projected expenditure trends, deficit and debt levels are projected over the long-
term. Debt sustainability is derived from the intertemporal budget constraint. It imposes that 
current total liabilities of the government, i.e. the current public debt and the discounted value 
of  future  expenditure  including  the  budgetary  impact  of  ageing  populations,  should  be 
covered by the discounted value of future government revenue. If current policies ensure that 
the intertemporal budget constraint is respected, current policies are sustainable.  

The  assessment  of  long-term  sustainability  of  public  finances  goes  beyond  answering  the 
question  whether  current  policies  are  sustainable  or  not.  An  estimation  of  the  size  of  the 
budgetary imbalances is also needed to understand the challenge that policy-makers face. This 
is  provided  by  sustainability  gap  indicators  that  measure  the  size  of  a  required  permanent 
budgetary  adjustment  (e.g.  a  constant  reduction  of  non  age-related  public  expenditure  as  a 
share of GDP or a constant increase in public revenue as a share of GDP) that enables respect 
of  the  government's  inter-temporal  budget  constraint,  thus  ensuring  sustainable  public 
finances.  The  sustainability  indicators  are  decomposed  into:  (i)  the  impact  of  the  initial 
budgetary position; and (ii) the long-term budgetary impact of ageing. 

The sustainability indicators provide a firm basis to identify the size and the main source of 
risks to public finance sustainability in the EU Member States. To reach an overall assessment 
of  the  sustainability  of  public  finances,  other  factors  are  taken  into  account,  which  allow  a 
better qualification of the assessment with regard to where the main risks are likely to stem 
from.  This  includes  factors  relating  to  both  short-  and  medium-term  developments  and  to 
long-term budgetary trends:  

•  the current stock of government debt is arguably the most important factor since: (i) high-
debt countries are more sensitive to short/medium term shocks to economic growth and to 
interest  rates  changes;  (ii)  a  high  level  of  debt  may  lead  to  a  higher  interest  rate  than 
assumed  in  the  projections  and  increase  further  the  risks  to  public  finance  sustainability; 
and  (iii)  high-debt  countries  need  to  maintain  large  primary  surpluses  for  a  prolonged 
period of time in order to reduce the level of debt, which may prove difficult to sustain in 
view of other competing budgetary pressures;  

•  the  medium-term  objectives  (MTOs)  and  short-term  budgetary  developments  provide 
information on the direction of fiscal policies. A scenario is run in which it is assumed for 
all countries that the medium-term objective is reached in 2010. It does not mean that the 
Commission  expects  all  Member  States  to  attain  the  MTO  in  2010;  some  have  already 
attained it while other might not reach it by 2010. It serves to illustrate to what extent, in 
most  cases,  budgetary  consolidation  can  contribute  to  reduce  risks  to  public  finance 
sustainability.  Moreover,  the  latest  Commission  services  forecasts  provide  the  expected 
short-term  budgetary  developments  on  a  no-policy  change  basis,  highlighting  whether 
there are risks attached to the Member States' budgetary plans in the short-term; 

•  sensitivity tests provide information on the robustness of the results with respect to changes 
to key parameters. For example, the resilience of the pension schemes to external shocks is 

4 

No  pension  projections  were  available  for  Greece  in  the  new  common  projections  exercise  and  the  rise  in  age-
related expenditure is therefore underestimated. Pension expenditure in Greece was projected to rise between 2005 
and  2050  by  12.4%  of  GDP  in  the  2001  common  projections  exercise  and  by  10.2%  in  the  2002  update  of  the 
Greek stability programme. 

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not the same in the different countries. Moreover, there is some uncertainty regarding the 
size  of  the  sustainability  challenge  in  the  EU  and  different  assumptions  concerning  the 
main  drivers  of  expenditure  can  have  a  large  impact.  Government  expenditure  may 
increase faster than implied by demographic change alone in the future. In the past, other 
factors such as increased provision and quality of public services have also contributed to 
the rising expenditure trends, e.g. on health-care; 

•  if average pensions become much smaller relative to average income than today different 
types  of  budgetary  pressures  could  arise  in  the  future.  This  could  be  the  case  if  e.g. 
insufficient  pensions  increased  the  risk  of  poverty  for  older  people  and  translated  into 
higher  public  social  expenditure,  or  if  private  pensions  turned  out  to  be  lower  than 
expected so that the government might have to compensate for this shortfall. A decrease in 
the relative level of pensions may therefore imply different risks to public finances unless 
measures are in place that enable appropriate retirement incomes for future pensioners;  

•  changes in government revenue as a share of GDP over the long-term have an impact on 
future budgetary developments. For example, if pension contributions are exempted from 
taxation while pension disbursements are subject to taxation, taxes on pensions as a share 
of  GDP  may  increase  over  the  long-term  if  countries  have  accumulated  large  assets  in 
funded pension schemes and the schemes have not yet matured;  

•  a high current tax ratio leaves more limited room of manoeuvre for using tax increases to 

finance additional public expenditure as compared to a lower tax ratio.  

However,  when  considering  these  factors,  a  cautious  approach  is  called  for,  as  they  are  not 
necessarily quantifiable; moreover, comprehensive information may not be available.  

In  order  to  indicate  the  relative  importance  of  the  risks  to  the  long-term  sustainability  of 
public  finances,  a  three  level  categorisation  is  used,  introduced  by  the  Commission  and  the 
Council  in  the  2005/06  round  of  assessment  of  the  stability  and  convergence  programmes: 
low / medium / high risk. This classification recognises that an ageing population represents a 
budgetary challenge over the long-term for all countries, i.e. low risk does not mean no risk. 
In  some  cases,  even  low  risk  countries  still  face  a  non-negligible  sustainability  gap.  These 
countries need to address the challenge of an ageing society by additional reforms and/or by 
improving  their  budgetary  situation.  Indeed,  there  is  some  uncertainty  regarding  the  future 
projected  expenditure  developments;  if  age-related  expenditure  is  also  influenced  by  factors 
other  than  demographic  change,  which  have  been  observed  in  the  past,  ensuring  fiscal 
sustainability  might  prove  even  more  challenging.  At  the  same  time  the  classification 
provides a clear distinction of the degree of risk EU Member States might face with regard to 
public finance sustainability. This, together with the analysis of the main sources of risks, is 
important in terms of identifying the appropriate policy response. 

3. 

OVERALL  ASSESSMENT  OF  THE  RISKS  TO  THE  LONG-TERM  SUSTAINABILITY  OF 
PUBLIC FINANCES IN THE EU 

The  EU  faces  a  considerable  challenge  in  view  of  ageing  populations  over  the  coming 
decades.  There  is  a  major  impact  of  ageing  on  public  expenditure  over  the  long-term, 
influenced  notably  by  a  significant  increase  in  pension  expenditure.  In  order  to  tackle  this 
budgetary challenge the EU needs to implement structural reform measures so as to curb the 
long-term expenditure trends and to raise potential growth, e.g. by raising employment rates 
or  the  effective  retirement  age.  In  addition,  pursuing  budgetary  consolidation  is  required  to 

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create  room  for  fiscal  manoeuvre  before  the  budgetary  impact  of  ageing  takes  hold.  In  the 
absence  of  reform  measures  and  budgetary  consolidation,  the  analysis  reveals  that  a 
considerable  sustainability  gap  of  about  3½%  of  GDP,  i.e.  the  gap  between  the  structural 
budgetary position in 2005 and a sustainable position, emerges in both the EU and the euro 
area.  

Unless  measures  are  taken  to  fill  this  gap,  the  government  debt/GDP  ratio  is  projected  to 
remain  above  60%  over  the  coming  decades  for  the  EU  as  a  whole  and  towards  2020,  it  is 
projected to start rising considerably, reaching almost 200% of GDP in 2050.  

Reconciling  the  long-term  policy  challenge  with  the  medium-term  budgetary  policy 
formulation process was an important element in the reform of the Stability and Growth Pact 
in  2005.  As  a  part  of  the  new  SGP,  medium-term  budgetary  objectives  (MTOs)  that  reflect 
country-specific characteristics, the debt/GDP ratio and the growth potential, were introduced. 

A  large  majority  of  countries  still  have  budget  deficits  above  their  MTOs  and  plan 
consolidating their public finances over the next few years. In order to illustrate the impact of 
a  medium-term  improvement  of  the  budgetary  position  on  long-term  sustainability,  an 
alternative scenario was analysed in which all the Member States are assumed to be at their 
MTO in 2010. Under this assumption, the sustainability gaps in the EU and in the euro area 
would  be  about  1½%  of  GDP.  Regarding  the  implications  for  debt  in  the  euro  area,  if  the 
MTOs are attained in 2010, the debt/GDP ratio is projected to be about 80% of GDP in 2050, 
compared  with  close  to  200%  of  GDP  if  the  2005  budgetary  position  remained  unchanged. 
For the EU as a whole, the debt/GDP ratio is projected to be below the 60% of GDP reference 
value until the early 2040s. 

The long-term budgetary challenge posed by ageing populations can thus be reduced, in fact 
more than halved, if Member States attain their MTOs in 2010 compared with the budgetary 
situation in 2005. This clearly illustrates that fiscal consolidation over the medium-term can 
contribute very significantly to reducing the fiscal sustainability challenge in the EU and the 
euro  area.  However,  it  is  not  sufficient  to  fully  cater  for  it.  Unless  the  underlying 
developments entailed by ageing are tackled, the debt/GDP ratio would still be on an upward 
trend in most countries by 2050.  

Ensuring  fiscal  sustainability  over  the  long-term  would  require  additional  budgetary 
consolidation  in  particular  in  the  absence  of  further  reform  measures  that  would  curb  the 
significant  increases  in  age-related  expenditure over  the  long-term  to  various  degrees  in  the 
Member States. Several Member States have reformed their pension systems in recent years, 
in particular in DE, FR and AT and also with earlier reforms e.g. IT and SE, which shows that 
a  determined  implementation  of  in  many  cases  difficult  reform  measures  have  reduced  the 
projected increase in pension expenditure. However, the projected expenditure increases are 
still  significant  in  the  EU.  Moreover,  to  secure  the  lasting  success  of  significant  pension 
reforms,  they  should  go  together  with  a  prolongation  of  working  lives  enabling  a  higher 
accumulation  of  pension  rights  and  thus  have  a  positive  impact  on  the  level  of  pensions 
relative to wages in the future; achieving this might however require other structural reforms. 

Assessment for the EU Member States  

While the budgetary impact of ageing populations is a concern for all the EU Member States, 
the EU aggregates mask considerable variety. There is a large variation across the EU in the 

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degree of risks and where they mainly come from. Overall, among the 25 Member States of 
the EU six countries are assessed to be at high risk, ten at medium risk and nine at low risk, 
which overall confirms the assessments of the stability and convergence programmes carried 
out in the early months of 2006. The main characteristics of the sustainability challenges they 
face can be summarized as follows: 

•  High risk countries  

The  high  risk  group  of  countries  (CZ,  EL,  CY,  HU,  PT  and  SI)  is  characterised  by  a  very 
significant  rise  in  age-related  expenditure  over  the  long-term,  underlining  that  measures 
aimed at curbing them will prove strictly necessary. Moreover, CZ, EL, CY, HU and PT have 
large deficits and in some cases also a high level of debt, in particular in Greece. Budgetary 
consolidation  is  as  well  necessary  and  urgent  in  order  for  these  countries  to  reduce  risks  to 
public finance sustainability.  

•  Medium risk countries  

The intermediate group of countries (BE, DE, ES, FR, IE, IT, LU, MT, SK and UK) consists 
of  countries  with  very  different  characteristics  but  a  relatively  clear-cut  distinction  appears 
between: (i) countries with a significant cost of ageing and where measures might be needed 
to  curb  these  costs,  but  which  currently  have  relatively  strong  budgetary  positions  (ES,  IE, 
LU);  and  (ii)  countries  that  need  to  consolidate,  though  to  different  degrees,  their  public 
finances over the medium-term but for which the costs of ageing are less of a concern, usually 
as a result of reforms made to their pension systems (SK, IT, DE, FR, UK and MT); within 
this group the situation of Italy should be highlighted, where a rapid budgetary consolidation 
is  required  to  ensure  a  steady  reduction  of  the  currently  very  high  level  of  debt.  Belgium 
shares  some  characteristics  of  both  sub-groups;  maintaining  a  strong  budget  balance  is 
necessary so as to reduce the very high level of debt as well as to offset the high increase in 
age-related expenditure, being above the EU average. However, even if it is maintained for a 
long  period  of  time,  the  current  high  primary  surplus  is  not  sufficient  to  fully  cover  the 
relatively high cost of ageing populations over the long-term. Measures aiming at curbing the 
projected increases in pension expenditure would undoubtedly contribute to reduce the risks 
to sustainability. 

•  Low risk countries 

The  low  risk  countries  (DK,  EE,  LV,  LT,  NL,  AT,  PL,  FI  and  SE)  have  in  general  come 
furthest in coping with ageing, which result from a strong budgetary position (running large 
surpluses, reducing debt and/or accumulating assets) and/or comprehensive pension reforms, 
sometimes  including  a  shift  towards  private  pension  schemes.  This  does  not  mean  that  in 
these countries there are no risks regarding the long-term sustainability of public finances. In 
fact, their situation relies on the successful implementation of the far-reaching reforms, which 
have  reduced  significantly  the  long-term  budgetary  impact  of  ageing  (EE,  LV,  LT,  AT,  PL 
and SE) and on maintaining the budgetary position or in some cases on strengthening it. Other 
countries with a relatively high projected cost of ageing, notably on pensions, may also need 
to consider structural reforms aimed at modifying the projected long-term budgetary trends at 
some point, should the current strong budgetary position not be maintained over the long-term 
(DK, NL and FI), although the overall adjustment required would be of a lesser degree than 
for medium and high risk countries.  

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4. 

ENSURING SUSTAINABLE PUBLIC FINANCES: A BROAD POLICY CHALLENGE FOR THE 
EU  

The analysis reveals that coping with the budgetary impact of ageing is a key policy challenge 
in  the  EU.  It  confirms  that  the  three-pronged  strategy  to  cope  with  the  economic  and 
budgetary  challenge  posed  by  ageing  populations  decided  by  the  Stockholm  European 
Council  in  2001  is  appropriate  and  needs  to  be  pursued,  i.e.  reducing  debt  at  a  fast  pace, 
raising employment rates and productivity, and reforming pension, health care and long-term 
care systems. 

First,  Member  States  need  to  achieve  more  rapidly  and  sustain  sound  underlying  budgetary 
positions so as to run down public debt at a fast pace before the full impact of ageing unfolds. 
Indeed,  the  sustainability  analysis  shows  that  consolidating  the  public  finances  towards  the 
MTOs  and  sustaining  such  a  position  will  significantly  contribute  to  alleviating  part  of  the 
long-term budgetary costs of ageing in the EU and will prevent a rapid and strong rise of the 
debt/GDP ratio. Moreover, sound public finances are a prerequisite for low interest rates and 
high and stable economic growth which would in turn contribute to improve the sustainability 
of public finances.  

Second,  there  is  a  need  to  raise  employment  rates,  especially  amongst  women  and  older 
workers,  and  appropriate  steps  should  be  envisaged  to  raise  labour  supply  and  labour 
utilisation.  The  analysis  in  the  report  shows  that  if  employment  rates  increased  more  than 
projected it would considerably contribute to fiscal sustainability. Indeed, in many countries, 
substantial  benefits  could  be  reaped  by  reducing  structural  unemployment  further. 
Successfully  implementing  such  policy  measures  and  enhance  productivity,  in  line  with  the 
goals  of  the  Lisbon  strategy,  would  furthermore  raise  potential  GDP  growth  rates,  improve 
future  living  standards,  provide  more  room  for  budgetary  reallocation  in  the  future.  In 
addition, the common long-term projections show that there could be some limited budgetary 
savings stemming from a projected reduction in education expenditure on account of ageing 
populations.  However,  in  view  of  the  need  to  enhance  productivity  in  the  future,  Member 
States could consider using those savings for modernising their education systems, including 
the  development  of  life  long  learning,  investing  to  raise  educational  attainment  levels  and 
improving the functioning of the educational systems, in line with the Lisbon commitments to 
build a knowledge-based economy and society.  

Third, Member States need to consider appropriate reforms of pension, health-care and long-
term care systems to ensure that they are financially viable in the face of ageing while at the 
same  time  securing  core  policy  goals  of  adequacy  and  access.  Recent  pension  reforms  in 
about half of the EU-15 Member States and in several new Member States have reduced the 
budgetary impact of ageing and are helping to raise the effective retirement age. Indeed, the 
analysis  shows  that  recent  pension  reforms,  e.g.  in  Germany,  France  and  Austria,  as  earlier 
reforms,  such  as  in  Italy  and  Sweden,  have  contributed  significantly  to  improve  the 
sustainability  of  public  finances.  Moreover,  raising  employment  is  unequivocally  welfare 
enhancing;  it  strengthens  the  financial  sustainability  of  pension  systems,  delays  the  start  of 
expenditure  rises,  increases  contributions  to  pension  schemes,  and  can  generate  additional 
budgetary savings. Moreover, raising employment rates, notably of older workers, is of prime 
importance  for  countries  where  a  significant  decrease  in  the  benefit  ratio,  i.e.  average 
pensions  over  GDP  per  worker,  is  projected,  as  it  reduces  the  risk  of  possibly  inadequate 
pensions in the future. In recent pension reforms, some Member States have introduced a link 
between  life  expectancy  at  retirement  and  pension  benefits  and  these  measures  appear  to 
achieve  a  better  sharing  of  demographic  risk.  This  provides  an  important  incentive  for 

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extending  working  lives.  Furthermore,  the  sustainability  analysis  shows  that  considerable 
budgetary savings on health-care expenditure may be realised if the projected increase in life 
expectancy  over  the  long-term  is  accompanied  by  an  increase  in  healthy  life  years  and  an 
improvement in the health status. Putting in place measures that improve the health status of 
the populations can thus contribute to easing the cost of ageing and improve the sustainability 
of public finances.  

In  addition  to  rigorously  implementing  the  consolidation  of  the  public  finances  over  the 
medium-term towards the MTOs and/or maintaining such a budgetary position so as to reduce 
sustainability  risks,  a  determined  effort  is  required  to  improve  the  functioning  of  the  EU 
economies  and  to  adapt  the  public  systems  to  be  better  able  to  cope  with  the  significant 
challenges ahead.  The policies behind this three-pronged strategy  are an  integral  part of  the 
Lisbon  strategy  insofar  as  raising  employment  rates  and  running  sound  macro-  and  micro-
economic  policies  are  conducive  to  economic  growth  and  prosperity.  The  appropriate 
combination  of  policies  in  these  three  areas  will  depend  on  the  main  reasons  behind  the 
sustainability  challenge  and  the  policy  priorities  that  the  Member  States  have  set  for 
themselves. 

* * * 

EN 

9 

   EN