Communication from the Commission to the European Parliament and the Council - Long-term sustainability of public finances for a recovering economy {SEC(2009) 1354}
Date: 2009-10-14
Institutions: European Commission
Subjects: EU Member State, economic recession, national budget, public debt, public finance, report

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.10.2009 
COM(2009) 545 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL  

Long-term sustainability of public finances for a recovering economy 

{SEC(2009) 1354} 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL  

Long-term sustainability of public finances for a recovering economy 

INTRODUCTION  

This  Communication and its companion  Report  (Sustainability Report 2009) assess 
the sustainability of public finances in the EU Member States. It is an update of the 
communication and report of 20061, following the request of the ECOFIN Council of 
November 20062, which asked the Commission to prepare a new sustainability report 
when  new  common  age-related  expenditure  projections  become  available  in  2009. 
The  Communication  is  issued  in  the  context  of  the  reflection  on  strategies  to  exit 
from  the  economic  and  financial  crisis  and  on  the  convergent  and  coordinated 
framework  for  the  reform  of  Europe's  economies  at  the  core  of  the  strategy  for 
Europe 2020. 

The report takes into account the context of the financial and economic crisis and its 
impact on public finances at the moment when the first signs of stabilisation become 
apparent.  As  long  as  the  recovery  is  not  sustained  and  the  discretionary  measures 
deployed  by  governments  are  not  withdrawn,  the  effect  of  the  crisis  on  public 
finances cannot be fully determined. However, given the large impact of the crisis on 
public debt, this communication provides a timely input at a stage where, in line with 
the  European  Council  position:  ‘fiscal  policies  must  progressively  be  reoriented 
towards sustainability’ and ‘exit strategies need to be designed now and implemented 
in a coordinated manner as soon as the recovery takes hold, taking into account the 
specific situation of individual countries’3. 

The regular assessment of fiscal sustainability is in line with the reformed Stability 
and Growth Pact (SGP), according to which long-term issues should get a prominent 
role in surveillance. Recently, Member States have agreed detailed principles on the 
revision of the medium-term budgetary objectives (MTO) in order to ensure that the 
Member  States’  budgetary  strategies  reflect  real  medium-term  needs,  by  taking 
account  not  just  of  debt  levels  but  also  implicit  liabilities,  notably  costs  related  to 
ageing populations, in particular projected healthcare and pension expenditure. 

AN ACUTE CHALLENGE AFTER THE CRISIS 

The European economy is showing signs of entering a phase of recovery after a 
deep  crisis.  Thanks  to  effective  and  substantive  policy  action  since  autumn  2008, 

‘Long-Term Sustainability of Public Finances in the EU,’ European Economy, 4/2006 and Commission 
communication - COM(2006) 574, 12.10.2006. 
Council Conclusions on ‘The Sustainability of Public Finances,’ 7 November 2006.  
Informal  meeting  of  EU  heads  of  State  or  Government,  ‘Agreed  language  for  the  Pittsburgh  G-20 
summit’, Brussels 17 September 2009.  

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coordinated in the context of the EERP4, a financial meltdown and a generalised loss 
of  confidence  has  been  avoided.  However,  uncertainty  remains  high,  and  there  are 
still  risks  of  negative  feedback  loops  between  the  financial  sector  and  the  real 
economy.  Given  the  output  losses  in  previous  quarters,  economic  activity  is  set  to 
shrink by 4 percent this year, while growth in 2010 will be slim.  

Fiscal  policymaking  has  been  successfully  targeted  to  the  need  and  urgency  of 
pulling  the  economy  out  of  the  recession.  Discretionary  fiscal  stimulus  and 
unfettered  automatic  stabilisers  have  provided  a  cushion  to  economic  activity  and 
contributed  to  the  recent  signs  of  improvement,  but  have  led  to  a  substantial 
deterioration in government accounts. From a deficit of 0.8 percent of GDP in 2007 – 
the  best  result  for  thirty  years  –  the  government  deficits  in  the  EU  are  forecast  to 
average 6 percent of GDP in 2009 and around 7 percent in 2010. In the three years to 
2010, the gross debt ratio for the EU as a whole is increasing by more than 20 points. 
Moreover,  exceptionally  large  contingent  liabilities  may  translate  into  actual  costs 
over the coming years, although some costs in support of the banking sector may be 
recouped. 

The  sustainability  of  public  finances  in  a  longer-term  perspective  must  not  be 
ignored. Though the debt and deficit increases are by themselves quite impressive, 
the projected impact on public finances of ageing populations is anticipated to dwarf 
the effect of the crisis many times over. The fiscal costs of the crisis and of projected 
demographic  development  compound  each  other  and  make  fiscal  sustainability  an 
acute  challenge.  The  available  projections  show  that,  in  the  absence  of  ambitious 
efforts  to  implement  structural  reforms  and  consolidate  government  accounts,  there 
would be very large increases in expenditure on debt interest and public pensions, as 
well as on healthcare and long-term care during the coming decades.  

HOW TO ASSESS LONG-TERM SUSTAINABILITY OF PUBLIC FINANCES  

Sustainability  relates  to  the  ability  of  a  government  to  assume  the  financial 
burden of its debt in the future. There is no defined upper limit to sustainable 
debt levels. Limits to sustainability differ across countries and time. The capacity to 
run high debts depends inter alia on the degree of development of financial markets, 
perceived  risks,  and  trust  in  the  capacity  of  a  government  to  implement  structural 
reforms and consolidate deficits. It also depends on the degree of global risk aversion 
and investments alternative to government bonds. However, countries with high debt 
ratios – as well as large external imbalances or contingent liabilities – are particularly 
exposed to market turbulences, such as changes in interest rates and spreads during 
times of evolving economic perspectives.  

A one-off increase in the stock of government debt need not put sustainability at 
risk. Fiscal expansion in a crisis context is not detrimental for sustainability as long 
as  the  measures  adopted  by  governments  are  temporary  and  phased  out  when  the 
recovery  is  secure.  Concerns  arise  from  the  structural  nature  of  high  deficits,  and 
because,  without  an  adequate  structural  reform  strategy,  the  crisis  may  have  a 

‘European  Economic  Recovery  Plan,’  communication  from  the  Communication  to  the  European 
Council - COM(2008) 800, 26.112008. 

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durable  impact  on  output  and  potential  growth,  which  overlaps  with  the  secular 
slowdown in GDP growth and the rise in expenditure on account of the demographic 
trends.  

Fiscal  policy  is  not  sustainable  if  it  implies  an  excessive  accumulation  of 
government debt over time – now or in the foreseeable future – and ever-increasing 
debt  service.  Sustainability  requires  the  avoidance  of  an  excessive  increase  in 
government  liabilities  –  a  burden  on  future  generations  –  while  ensuring  the 
government’s  capacity  to  deliver  the  necessary  public  services,  including  the 
necessary safety net in times of hardship, and ability to adjust policy in response to 
new challenges.  

In  order  to  analyse  whether,  based  on  current  policies,  government  finances  are 
sustainable,  a  long-term  perspective  is  thus  necessary.  The  assessment  is  based  on 
long-term projections5 of government expenditure, revenue and deficit that take into 
account  expenditure  drivers  such  as  demographics  and  debt  accumulation.  To 
quantify  the  sustainability  risks  of  the  Member  States’  public  finances,  the 
established  concept  of  sustainability  gap  is  used.  This  indicator  measures  by  how 
much  tax  or  spending  would  need  to  be  adjusted,  now  and  in  a  lasting  manner,  to 
ensure  that  the  government  debt  remains  within  manageable  limits  over  the 
projection horizon. However, a complete assessment also requires the consideration 
of  a  series  of  other  indicators,  such  as  the  current  debt,  contingent  liabilities,  the 
stock of government-owned assets, the tax burden, the projected evolution of average 
pensions and the performance of private funded pension schemes, the developments 
in  the  sustainability  gaps  in  case  no  action  is  taken,  as  well  as  the  possible 
reinforcement of social protection in some countries. 

An increase in debt ratios in the coming decades is avoidable, and policy measures 
can and should be taken to escape a trend of increasing debt. The long-term scenarios 
– under unchanged policies, therefore not including measures that governments may 
be considering but that have not yet been adopted – in the companion report show a 
relentless  increase in  debt  ratio  over  the coming decades. These scenarios allow an 
assessment  of  the  risks  Member  States  are  confronted  with,  but  they  are  not 
inevitable.  Unchanged  policy  scenarios  are  state-of-the-art 
long-term 
sustainability assessments, but they are not realistic forecasts in any country. Those 
scenarios  are  useful  to  illustrate  the  size  of  the  policy  action  that  is  necessary  to 
ensure  sustainable  public  finances,  and  show  the  outcome  if  no  action  was  taken. 
This  approach,  already  used  in  the  Sustainability  Report  of  2006,  was  endorsed  by 
the ECOFIN Council of November 2006, which concluded that such a report should 
be the basis for the assessments of long-term sustainability in the context of annual 
stability and convergence programmes. 

for 

The  assessment  of  the  long-term  sustainability  of  fiscal  policy  is  now  a  well 
established part of budgetary surveillance in the EU. However, in a context of crisis 
and  recovery,  the  sustainability  assessment  is  undertaken  under  larger  than 
usual  uncertainty.  On  the  one  hand,  it  is  difficult  to  correctly  judge  the  initial 

‘2009  Ageing  Report,’  joint  report  of  the  Commission  and  the  EPC,  European  Economy,  2,  and 
Commission  communication  ‘Dealing  with  the  Impact  of  an  Ageing  Population  in  the  EU’  - 
COM(2009) 180, 21.42009. 

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structural  fiscal  position  in  2009.  This  is  related  to  the  uncertainty  on  the  potential 
output and the output gap, but also on the way that tax revenue has been affected by 
the  crisis,  as  well  as  on  the  durable  or  temporary  nature  of  the  support  measures 
adopted by governments. In so far as the temporary measures taken in the context of 
the  crisis  have  not  be  fully  filtered  out  of  structural  deficits,  the  sustainability  risk 
may  have  been  overestimated.  On  the  other  hand,  if  growth-enhancing  reforms  are 
not adopted, the crisis may have a protracted impact on the way our economies will 
grow over the next decade; in this case, the baseline sustainability indicators in the 
companion report would underestimate risks.  

ASSESSMENT OF SUSTAINABILITY BY COUNTRY 

The  long-term  sustainability  of  the  public  finances  and  the  budgetary  impact  of 
ageing populations is a concern for all EU Member States. However, there are large 
variations across the Member States in terms of the degree of long-term risk that they 
are exposed to and the sources of that risk. This variation results from: (i) differences 
in their initial budgetary positions in 2009 for general government, including the debt 
level  and  the  structural  deficit;  (ii) differences  in  the  financing  and  scope  of  social 
protection systems (iii) differences in potential growth that result from their relative 
levels of development and the projected demographic developments.  

On the basis of the quantitative sustainability indicators6, the sensitivity analysis of 
the  underlying  assumptions  and  additional  factors,  such  as  debt,  government  assets 
and  pension  projections,  an  overall  assessment  of  the  long-term  risks  to  public 
finance sustainability the different Member States might face is reached7. Based on 
this methodology and following the approach developed in the 2006 Communication, 
and  as  presented  in  that  communication  and  endorsed  in  the  ECOFIN  Council 
conclusions  of  November  2006,  Member  States  are  classified  into  categories 
depending on the degree of long-term risks they faced and where these risks mainly 
come  from.  In  its  conclusions  the  Council  also  considered  that  the  categorisation 
used in the sustainability report provides an important tool to assess the sustainability 
challenges that Member States are facing. 

Bulgaria,  Denmark,  Estonia,  Finland  and  Sweden  have  relatively  stronger 
budgetary  positions  and  have  undertaken  comprehensive  pension  reforms  in  recent 
years.  Though  the  crisis  is  leading  to  a  deterioration  in  government  balances  and  a 
substantial  increase  in  government  debt  ratios  of  each  of  these  countries,  their 
structural  fiscal  positions  remain  sounder  than  in  most  other  EU  countries  and 
present, therefore, a low long-term risk. In Bulgaria, Denmark, Estonia and Sweden, 
the increase in age-related expenditure over the next decades is projected to be well 
below the EU average. In Finland, the projected increase in expenditure is substantial 
and the fiscal cost of the crisis has been large. However, the large stock of financial 
assets in the social security portfolio provides a cushion to absorb a deterioration in 
government accounts. 

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Sustainability  indicators  assume  age-related  expenditure  (pensions,  healthcare,  long-term  care, 
unemployment and education) will evolve in line with demographic projections, and the constancy of 
the ratio-to-GDP of revenue and other primary expenditure. 
The  companion  report  contains  a  detailed  explanation  of  the  methodology  used  and  of  the  different 
alternative scenarios. 

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Belgium, Germany, France, Italy, Hungary, Luxembourg, Austria, Poland and 
Portugal  are  countries  with  very  different  characteristics  in  relation  to  their  initial 
budgetary position and age-related expenditure.  Belgium,  Germany  and  Austria  are 
projected to bear costs of ageing close to, or above, the EU average, but their initial 
budgetary positions are relatively sound, provided that the crisis-related deterioration 
in  government  accounts  does  not  become  structural.  Though  medium-term 
consolidation  will  improve  the  sustainability  indicators,  reforms  to  address  rising 
age-related  costs  will  be  indispensable.  For  Belgium,  the  debt  ratio  –  which  is 
returning to above 100 percent of GDP – constitutes a burden and a specific risk. The 
projected increase in the age-related expenditure in Luxembourg is the highest of the 
whole  EU;  however,  this  risk  is  cushioned  by  the  currently  low  debt  and  large 
government-owned financial assets.  

For  France,  Italy,  Hungary,  Poland  and  Portugal,  the  long-term  costs  of  ageing  are 
not projected to be particularly high. However, their initial budgetary positions imply 
that  fiscal  policy  is  unsustainable  even  without  considering  any  increase  in  age-
related expenditure. In all these countries, the crisis and the support to recovery are 
leading  to  a  very  fast  increase  in  debt  ratios,  quickly  offsetting  the  consolidation 
gains achieved in recent years. For Poland, projections indicate a fall in age-related 
expenditure  over  the  long  term  because  of  the  shift  of  pension  provision  to  funded 
schemes;  however,  the  projected  reduction  in  expenditure  is  also  related  to  a  large 
cut in benefit ratios. This may raise issues of pension adequacy and increase old-age 
poverty.  For  France,  ambitious  fiscal  consolidation,  once  the  recovery  is  firmer,  is 
indispensable and will constitute a major step to improve sustainability. In Portugal, 
a  recent  pension  reform  have  done  much  to  improve  sustainability;  however,  the 
structural  budgetary  position  remains  largely  unbalanced.  In  the  case  of  Italy,  fast 
fiscal consolidation once the recovery takes hold is indispensable to ensure a steady 
reduction in the very high debt ratio8. The low sustainability gap of Hungary results 
from  pension  reform  and  recent  fiscal  consolidation;  however,  the  correction  in 
structural imbalances in recent years needs to be pursued further in order to reduce 
debt.  In  general,  for  this  group  of  countries  the  long-term  sustainability  risk  is 
medium. 

The  sustainability  gaps  of  Czech  Republic,  Cyprus,  Ireland,  Greece,  Spain, 
Latvia, Lithuania, Malta, the Netherlands, Romania, Slovenia, Slovakia and the 
United Kingdomare all above 6 percent of GDP; over double that level in Ireland, 
Greece, Spain, Slovenia and the United Kingdom. In nearly all of these countries, the 
sustainability  gaps  are  the  result  of  a  very  large  projected  increase  in  age-related 
expenditure, compounded in most cases by large initial imbalances, and hence they 
are  exposed  to  a  higher  long-term  risk.  This  indicates  that  closing  their  gaps  will 
require  both  ambitious  consolidation  programmes  that  reduce  debts  and  deficits  in 
the coming years, and profound reforms of social protection. This is particularly the 
case for Greece, which faces the second highest increase in age-related expenditure 
of the entire EU, while its very high debt ratio adds to the concerns on sustainability. 
The  possible  continuing  effects  of  the  crisis  on  the  budgetary  position  and  on 
medium-term  growth  are  a  serious  concern  for  most  of  the  high  risk  countries  –  in 
particular, Ireland, Greece, Latvia, Spain and United Kingdom – for whom avoiding 

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This  is  projected  to  be  above  116  percent  of  GDP  at  the  end  of  2010  –  the  highest  ratio  since  the 
creation of the euro. 

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a  very  fast  increase  in  debt  ratios  is  a  policy  challenge  already  in  a  medium-term 
perspective.  

In  many  countries,  there  has  been  a  deterioration  in  sustainability  in 
comparison  with  previous  assessments.  Compared  with  the  2006  situation,  the 
sustainability  gaps  are  larger  in  most  countries  and  ten  of  them  (Ireland,  Spain, 
Latvia, Lithuania, Malta, the Netherlands, Austria, Poland, Slovakia and the United 
Kingdom) are now in a higher risk category. In the case of the countries most hit by 
the  crisis,  the  deterioration  in  sustainability  gaps  is  particularly  severe.  However, 
thanks to consolidation and pension reform, Hungary and Portugal have shifted from 
the higher to the medium-risk group of countries.  

SUSTAINABILITY  OF  PUBLIC  FINANCES  FOR  A  RECOVERING  ECONOMY:  POLICY 
CHALLENGES 

The  crisis-related  deterioration  in  public  finances  and  the  projected  increase  in 
expenditure  due  to  demographic  change  both  constitute  major  policy  challenges. 
Given the current budgetary situation, the projected changes in population structure 
and  the  long-term  scenarios  for  economic  growth,  the  government  debts  of  many 
countries  will  experience  significant  increases.  Though  interest  rates  are  currently 
low,  soaring  government  bond  issuance  will  put  upward  pressure  on  rates  as  the 
economies emerge from crisis and crowd out investment. Public finances, including 
social  protection  systems,  have  cushioned  the  economic  and  social  impact  of  the 
crisis. Notwithstanding the need to keep supporting the economy and avoid choking 
an  emerging  recovery,  measures  to  improve  fiscal  sustainability,  identified  in 
Member States’ stability and convergence programmes, should be implemented in a 
decisive manner as soon as conditions allow it, to avoid a more severe correction at a 
later stage. 

High debt ratios in the past have often been corrected by fast economic growth. With 
demographic developments negatively affecting potential growth, the importance of 
productivity-enhancing reforms will further increase. The reduction in debt ratios 
will  have  to  come  from  a  combination  of  fiscal  consolidation  and  structural 
reforms to support potential growth. 

A fast and unsustainable increase in government debt in the coming decades can 
be  avoided.  The  strategy  to  prepare  for  the  economic  implications  of  the 
demographic  changes  has  been  in  place  since  the  2001  European  Council  of 
Stockholm.  This  strategy  includes  (i)  deficit  and  debt  reduction,  (ii)  increases  in 
employment  rates  and  (iii) reforms  of  social  protection  systems.  It  has  shown  its 
validity  and  remains  applicable.  Yet,  the  macroeconomic  situation  created  by  the 
crisis has changed the context, the way such a strategy may be applied, the relative 
weight of its components and the urgency of its implementation. While, prior to the 
crisis,  the  three  prongs  of  the  strategy  were  options  from  which  countries  could 
choose, each of these pillars is now indispensable for most EU countries. 

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The first element of the sustainability-oriented strategy refers to the need to reduce 
debt, by reaching and sustaining sound underlying budgetary balances. In the decade 
prior to the crisis, ambitious consolidation was successfully implemented in several 
countries.  The  Member  States  that  reached  their  MTOs  in  line  with  the  SGP 

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managed  to  reduce  their  debt  ratios  substantially  and  improved  their  sustainability 
indicators.  This  provided  them  with  a  new-found  leeway  to  implement  a  counter-
cyclical expansionary policy when the crisis came into full force in the second half of 
2008. 

Simply  overcoming  the  ongoing  economic  and  financial  crisis  without  fiscal 
consolidation in a determined manner will not suffice to bring government debts to a 
sustainable path. Projections based on a scenario of growth returning to the long-term 
path of before the crisis show that without consolidation, the gross debt-to-GDP ratio 
for  the  EU  as  a  whole  could  reach  100  percent  as  early  as  2014,  and  keep  on 
increasing. A consolidation effort of 0.5 percent of GDP per year until the Member 
States’ MTOs are reached9 will only stabilise the debt ratio at around 100 percent of 
GDP  if  growth  takes  time  to  return  to  the  pre-crisis  trend.  Thus,  although  fiscal 
support  must  be  maintained  until  recovery  is  secured,  fiscal  policies  must 
progressively be reoriented towards sustainability. 

A  fast  reduction  in  the  debt  ratio  will  also  depend  on  an  orderly  disposal  of  assets 
accumulated  in  support  of  the  financial  sector,  and  an  effective  management  of 
contingent liabilities10. The appropriate withdrawal of public-sector support measures 
for the financial sector must reconcile the need to safeguard financial stability with 
the  medium-term  goal  of  returning  the  sector  viability  and  competitive  market 
functioning, and protecting taxpayers’ interests in line with state aid policy. 

The second leg of the strategy concerns increasing employment rates. Structural 
reforms,  in  particular  aiming  at  improving  the  functioning  of  labour  markets,  have 
contributed  to  raising  employment  rates  among  older  workers  and  women,  and  to 
increase growth potential. The increase in employment rates prior to the crisis was an 
important  step  towards  sustainability,  by  counteracting  some  of  the  effect  that  a 
reduction in the working age population would have on growth. At the current time, 
where  employment  is  contracting  and  unemployment  is  rising,  there  is  a  need  to 
avoid  cyclical  unemployment  becoming  entrenched,  an  increase  in  long-term 
unemployment and a reduction in participation rates. There is a broad consensus on a 
set  of  European  principles11  to  mitigate  the  impact  of  the  crisis,  shape  a  lasting 
recovery and contribute to potential growth in a longer perspective: it is important to 
prioritise  measures  aimed  at  reducing  the  costs  of  adjustment  and  speeding  up 
transitions in the labour market. Policies should be in synergy with the social goals 
of supporting the income of the most disadvantaged citizens, which in itself will 
assist  stimulating  aggregate  demand.  Short-term  policies  to  address  the  crisis 
should not run counter to long-term reform strategies, including the implementation 
of the flexicurity principles under the Lisbon Strategy. In particular, Member States 
should  refrain  from  using  policies  such  as  early  retirement  schemes  in  order  to 
mitigate  the  impact  of  higher  unemployment  and  industrial  restructuring.  In  euro-
area countries, labour-market policies should also facilitate structural adjustment, in 
particular  with 
in  external 
competiveness, through their impact on unit labour costs. 

to  addressing  significant  divergences 

regard 

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That is the benchmark consolidation rhythm in the SGP. 
Guarantees to bonds or loans issued by banks, special purpose vehicles (‘bad banks’) and other entities. 
‘Driving  European  Recovery,’  Commission  Communication  for  the  Spring  European  Council  - 
COM(2009) 114, 4.3.2009. 

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A key lesson of financial crisis in the past is the likely negative impact on potential 
growth  and  the  need  for  structural  adjustment,  reallocations  and  innovation  to 
counter  it.  Structural  reforms  thus  have  a  crucial  role  to  play  in  an  overall  strategy 
designed  to  return  economies  to  sustainable  growth  and  fiscal  paths.  While  being 
tailored  to  the  specific  circumstance  in  each  country,  reform  agendas  to  bolster 
potential growth should include, not only the above-mentioned measures to improve 
the labour markets and increase participation rates, but also a full exploitation of the 
Single Market; reforms to improve the functioning of the EU’s knowledge triangle of 
education, R&D and innovation, which contribute to technological developments and 
productivity growth, and efforts in relation to green technologies.  

Reforms  to  social  protection  systems  –  the  third  element  of  the  strategy  –  are 
necessary. For many Member States, the primary surpluses that would be required to 
reduce  debt  and  ensure  a  full  pre-funding  of  ageing-related  cost  are  unrealistically 
large. Those primary surpluses are well above the historical levels ever recorded in 
EU countries, and would have to be sustained for very long.  

The main policy lever to ensure sustainability is through reform of pension and 
healthcare systems. In relation to pensions, several reforming avenues are possible 
and  have  been  implemented  or  are  being  contemplated  by  several  countries.  These 
range from, changes in the rules on the accumulation of pension rights, establishing a 
better  link between contributions paid during  working life and  pensions, increasing 
statutory retirement age, tightening eligibility requirements and removing incentives 
to early retirement. In several countries, future pensioners have been encouraged to 
top-up their public pensions with their own savings and funded old-age income. Yet, 
developments  in  financial  markets  during  the  crisis  have  illustrated  the  risks 
associated  with  the  shifting  of  a  large  share  of  pension  provision  to  privately-
managed  funded  schemes,  and  has  reduced  the  political  and  social  support  to 
implement  reforms  that  leave  a  large  proportion  of  pensions  subject  to  market 
fluctuations.  The  Commission  will  continue  to  work  with  the  Council  and  the 
Member  States  to  identify  lessons  for  the  design  of  funded  schemes  and  target 
beneficiaries  in  order  to  secure  adequate  and  sustainable  private  pension  provision. 
Each country will have to identify the reforms that better fits its own characteristics 
and social preferences and consensus will be desirable to implement them. Increases 
in  the  effective  retirement  age  that  reflect  gains  in  longevity  are  being 
contemplated  in  several Member States and merit wider consideration. On  top 
of savings to government expenditure in a medium- to long-term horizon, an increase 
in  the  statutory  and  effective  retirement  ages  contributes  to  increase  the  working 
population and stem the deceleration in potential output. Moreover, the extension in 
working life and the respective accumulation of pension rights will have a favourable 
impact on pensioners’ income.  

30. 

The projected long-term increase in healthcare spending is large and constitutes 
on  its  own  a  risk  to  sustainability.  Given  the  complex  and  hardly  predictable 
mechanisms  of  progress  in  medical  technology,  which  have  accounted  for  a 
considerable  share  of  expenditure  growth,  the  projections  may  even  underestimate 
future  spending.  Moreover,  for  some  countries,  a  need  to  improve  the  quantity  and 
quality  of  health  services  and  to  widen  the  coverage  of  formal  long-term  care 
provided  to  elderly  may  add  further  pressure  on  public  finances.  Given  its 
multidimensional  nature,  a  reform  of  healthcare  needs  to  consider  several  complex 
issues, on ways to make health system more efficient; on the resources allocated to 

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31. 

6. 

32. 

33. 

34. 

preventive and curative medicine; on responding to the challenge of maintaining an 
appropriate  healthcare  workforce;  on  the  balance  of  financing  between  patients, 
public  and  private  insurers;  the  degree  of  competition  among  providers  of  care;  on 
the  effective  assessment  and  management  of  technology  aiming  at  fostering 
efficiency  and  ensuring  high-quality  services  while  rationalising  costs;  or  ethical 
issues like access to expensive treatments. 

services  and 

As  public  resources  are  scarce,  an  increase  in  the  quality  of  public  finances  is 
reducing  non-productive 
indispensable.  Modernising  public 
expenditure helps stemming the debt increases, frees resources to invest in growth-
boosting  areas  such  as  education,  research  and  innovation,  and  other  policy 
objectives  (social,  environmental,  health)  and  strengthens  incentives  for  raising  the 
productive capacity of the economy. Fiscal consolidation through raising additional 
revenue should take account of incentive effects, efficiency and competitiveness, be 
focused on those measures with the least distortionary effects, in particular on labour 
participation  and  capital  accumulation,  while  contributing  to  meeting  other  goals 
(e.g. green taxes). . 

CONCLUSION 

The available long-term projections show that, in the absence of an ambitious effort 
to  consolidate  government  accounts  and  structural  reforms,  there  would  be 
unbearable  increases  in  debt  interest  and  pension  expenditure,  as  well  as  on 
healthcare  and  long-term  care  during  the  coming  decades.  Rising  government 
expenditure and prospects of an ever-increasing debt would be an obstacle to a 
sustained and long-lasting recovery and balanced economic growth. 

Successful  fiscal  expansion  to  counter  recession  and  longer-term  fiscal 
sustainability  are  not  incompatible.  Fiscal  measures  to  increase  confidence  and 
support demand are only successful if they are perceived by the markets and public 
opinion  as  temporary  and  consistent  with  long-term  sustainability.  Otherwise,  if 
economic  agents  expect  a  durable  widening  of  debt,  fiscal  support  will  lose  its 
effectiveness and can become counterproductive, in particular when the crisis climax 
has been overcome and one enters a phase of recovery. 

Past  experiences  show  that,  by  illustrating  the  need  and  urgency  of  structural 
reforms, crises constitute a window of opportunity that governments can use to make 
decisive  breakthroughs  in  structural  reforms.  Fiscal  exit  strategies  aiming  at 
achieving ambitious and realistic medium-term objectives need to be designed now, 
and implemented in a coordinated manner as soon as recovery takes hold, taking into 
account  the  specific  situations  of  individual  countries.  To  support  the  required 
reforms and enhance the credibility of fiscal adjustment – which inevitably stretches 
over a number of years – Member States may also need to develop further their own 
stability-enhancing  institutional  arrangements.  In  the  Stability  and  Growth  Pact 
context,  debt  sustainability  should  get  a  very  prominent  and  explicit  role  in 
surveillance procedures. 

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35. 

It is in the context of the sustainability challenge and the need to support the nascent 
recovery  that  the  Commission  has  recommended  the  correction  of  imbalances  in 
those countries that are currently in a situation of excessive deficit. It is also in this 
perspective that Member States should set out ambitious and realistic targets in their 
stability  and  convergence  programmes.  These  are  expected  to  give  a  specific 
attention to sustainability-oriented strategies. 

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