Commission staff working document - Sustainability Report 2009 accompanying the Communication from the Commission to the European Parliament and the Council - Sustainability of public finances for a recovering economy {COM(2009) 545 final}
Date: 2009-10-14
Institutions: European Commission
Subjects: EU Member State, economic recession, national budget, public debt, public finance, report

EN 

EN 

EN 

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 14.10.2009 
SEC(2009) 1354 

COMMISSION STAFF WORKING DOCUMENT 

Sustainability Report 2009 

accompanying the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Sustainability of public finances for a recovering economy 

{COM(2009) 545 final} 

 
 
 
 
 
 
 
 
 
European Commission 

Directorate-General for Economic and Financial Affairs 

Sustainability Report - 2009 

EUROPEAN ECONOMY 

9/2009 

 
 
 
ABBREVIATIONS AND SYMBOLS USED 

Member States 

BE 

BG 

CZ 

Belgium 

Bulgaria 

Czech Republic 

DK  

Denmark 

DE 

IE  

EE 

EL  

ES  

FR  

IT  

CY 

LV 

LT 

LU  

HU 

MT 

NL  

AT  

PL 

PT  

RO 

SI 

SK 

FI  

SE  

UK  

Germany 

Ireland 

Estonia  

Greece 

Spain 

France 

Italy 

Cyprus 

Latvia 

Lithuania 

Luxembourg 

Hungary 

Malta 

The Netherlands 

Austria 

Poland 

Portugal 

Romania 

Slovenia 

Slovak Republic 

Finland 

Sweden 

United Kingdom 

EA 
European Union Member States having adopted the single currency (BE, DE, EL, ES, FR, IE, 
IT,  CY,  LU,  MT,  NL,  AU,  PT,  SI,  SK,  FI),  i.e.  countries  participating  in  the  economic  and  monetary 
union without a derogation 

EU-27  European Union, 27 Member States 

Other 

AR  

CAB  

CBO  

DR  

EDP  

Ageing Report 

Cyclically-Adjusted Balance 

Congress Budget Office 

Debt Requirement in 2060 

Excessive Deficit Procedure 

iii 

 
 
 
 
 
 
 
EMU  

EPC  

ERM II   

ESA95    

GDP  

IBP  

IMF  

LTC  

MTO  

NAIRU   

PAYG    

RPB  

SCP 

SFA  

SGP  

Economic and Monetary Union 

Economic Policy Committee 

European Exchange Rate Mechanism, replacing the original ERM in 1999 

European System of national Accounts 1995 

Gross Domestic Product 

Required adjustment given the initial budgetary position 

International Monetary Fund 

Required adjustment given the long-term change in the budgetary position 

Medium-Term Objective 

Non-Accelerating Inflation Rate of Unemployment 

Pay-As-You-Go 

Required Primary Balance 

Stability and Convergence Programmes 

Stock-Flow Adjustment 

Stability and Growth Pact 

iv 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACKNOWLEDGEMENTS 

This  report  was  prepared  in  the  Directorate  General  for  Economic  and  Financial  Affairs  under  the 
direction  of  Marco  Buti,  Director  General,  and  Servaas  Deroose,  Director  of  the  Directorate  for  the 
macroeconomy of the euro area and the EU. 

The  main  contributors  were  Kamil  Dybczak,  Christine  Frayne,  Veli  Laine  and  João  Nogueira  Martins. 
Tamás Gábor Szin was responsible for statistical and editorial work. 

Specific contributions were provided by Salvador Barrios, Per Eckefeldt, Bartosz Przywara, Etienne Sail 
and Zbigniew Truchlewski.  

The  country  sections  in  Chapter  VII  benefitted  from  comments  from  desk  officers  in  the  directorates 
Economies of the Member States I and II under the responsibility of directors Jürgen Kröger and Elena 
Flores Gual. 

Comments and suggestions by colleagues in the Directorate General for Economic and Financial Affairs 
as well as by other services of the Commission are gratefully acknowledged. 

Excellent secretarial support was provided by Dominique Prins and Els Versteven. 

Comments on the report would be gratefully received and should be sent to: 
Directorate-General for Economic and Financial Affairs 
Macroeconomy of the euro area and the EU 
Unit C4: Fiscal Sustainability 
European Commission 
B-1049 Brussels 

or by e-mail to joao.nogueiramartins@ec.europa.eu 

v 

 
 
 
 
 
CONTENTS 

Editorial 

Executive summary 

Chapter I:  Sustainability of public finances 

Summary 

1.  Defining sustainability 

1.1.  What is meant by the sustainability of the public finances 

1.2.  Defining the sustainability indicators 

1.3. 

Interpreting the sustainability indicators 

1.4.  Other concepts of sustainability 
2.  Deriving the sustainability indicators 

2.1. 

2.2. 

2.3. 

Required adjustment given The initial budgetary position 

The debt requirement by 2060 

The required adjustment given the increase in age-related costs 

2.4. 

Policy implications 
3.  Estimating the cost of ageing 

3.1.  projecting age-related expenditure 

3.2.  A partial equilibrium analysis 

3.3.  Unchanged policy assumption 

Chapter II:  The economic and budgetary implications of ageing 

Summary 

1. 

The effect of demographic changes 

1.1. 

1.2. 

1.3. 

1.4. 

Population ageing 

Labour force projections 

Labour productivity and potential growth 

Budgetary projections 

Chapter III: Quantitative sustainability results 

Summary 

1. 

The sustainability results 

1.1. 

The quantitative indicators 

1.2.  A graphic representation of the sustainability gap (S2) 

1.3. 

1.4. 

1.5. 

The long term budgetary cost of ageing 

The initial budgetary position 

Required primary balance 

1.6.  Government debt projections 

2.  Comparison with the 2006 sustainability report 
3. 

The cost of no policy reaction 

XIII 

1 

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9 
10 

10 

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41 
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Chapter IV: The potential impact of the current economic crisis and 

sensitivity analysis 

Summary 

1. 

The effect of the financial crisis 

1.1. 

1.2. 

1.3. 

The perspectives for economic growth 

Three medium-term post-crisis SCENARIOS 

The budgetary impact of the post-crisis scenarios 

Implications on sustainability indicators of the Alternative POST-CRISIs cenarios 

1.4. 
The effect of fiscal consolidation: an MTO scenario 
Sensitivity analysis not linked to the financial crisis 

2. 
3. 

3.1. 

3.2. 

3.3. 

Life expectancy 

Labour productivity 

Employment rate 

3.4.  Migration 

3.5. 

Interest rate 

3.6.  Alternative health care scenarios 

3.7.  Changes in the long-term care assumptions 

Chapter V: Other factors 

Summary 

1.  Debt and assets 

1.1. 

1.2. 

The level and evolution of Gross debt 

Primary balance 

1.3.  Government Assets 

2.  Pension projections 

2.1. 

2.2. 

Pension expenditure projections and social and political risks. 

Private funded pension schemes and financial risks 

3.  Contingent liabilities 
4. 

Tax ratio 

Chapter VI: Overall classification of the long-term risks to the 

sustainability of public finances 

Summary 

1.  Overall assessment 

1.1. 

The sustainability indicators 

1.2.  Additional factors 

1.3.  Overall assessment 

2.  Assessment of sustainability risks for the Member States 

2.1. 

Low long-term risk countries 

2.2.  Medium-risk countries 

2.3.  High long-term risk countries 

Chapter VII: 

Sustainability assessment per Member State 

1.  Belgium 

1.1.  Overview of the results 

1.2.  Overall assessment 

45 

47 
48 

48 

49 

51 

52 
54 
57 

57 

58 

58 

59 

62 

62 

64 

67 

69 
70 

70 

71 

72 
73 

73 

75 
77 
79 

81 

83 
84 

84 

84 

85 
89 

89 

89 

90 

91 

92 

92 

92 

viii 

 
 
2.  Bulgaria 

2.1.  Overview of the results 

2.2.  Overall Assessment 
The Czech Republic 

3. 

3.1.  Overview of the results 

3.2.  Overall assessment 

4.  Denmark 

4.1.  Overview of the results 

4.2.  Overall assessment 

5.  Germany 

5.1.  Overview of the results 

5.2.  Overall assessment 

6.  Estonia 

6.1.  Overview of the results 

6.2.  Overall assessment 
Ireland 

7. 

7.1.  Overview of the results 

7.2.  Overall assessment 

8.  Greece 

8.1.  Overview of the results 

8.2.  Overall assessment 
Spain 

9. 

9.1.  Overview of the results 

9.2.  Overall assessment 

10.  France 

10.1.  Overview of Results 

10.2.  Overall Assessment 

11.  Italy 

11.1.  Overview of the results 

11.2.  Overall assessment 

12.  Cyprus 

12.1.  Overview of the results 

12.2.  Overall assessment 

13.  Latvia 

13.1.  Overview of the results 

13.2.  Overall assessment 

14.  Lithuania 

14.1.  Overview of the results 

14.2.  Overall assessment 

15.  Luxembourg 

15.1.  Overview of the results 

15.2.  Overall assessment 

16.  Hungary 

16.1.  Overview of the results 

16.2.  Overall assessment 

17.  Malta 

17.1.  Overview of the results 

17.2.  Overall assessment 

94 

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94 
96 

96 

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98 

98 

98 
100 

100 

100 
102 

102 

102 
104 

104 

104 
106 

106 

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108 

108 

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110 

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112 

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118 

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120 

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124 

124 

ix 

 
 
18.  The Netherlands 

18.1.  Overview of the results 

18.2.  Overall assessment 

19.  Austria 

19.1.  Overview of the results 

19.2.  Overall assessment 

20.  Poland 

20.1.  Overview of the results 

20.2.  Overall assessment 

21.  Portugal 

21.1.  Overview of the results 

21.2.  Overall assessment 

22.  Romania 

22.1.  Overview of the results 

22.2.  Overall assessment 

23.  Slovenia 

23.1.  Overview of the results 

23.2.  Overall assessment 

24.  Slovakia 

24.1.  Overview of the results 

24.2.  Overall assessment 

25.  Finland 

25.1.  Overview of the results 

25.2.  Overall assessment 

26.  Sweden 

26.1.  Overview of the results 

26.2.  Overall assessment 

27.  United Kingdom 

27.1.  Overview of results 

27.2.  Overall assessment 

Chapter A.I:  Deriving the sustainability indicators 

1.  Deriving the sustainability indicators 

Chapter A.II:  Revenue projections 

1.  Revenue projections 

LIST OF TABLES 

I.2.1. 

II.1.1. 

II.1.2. 

Summarising the indicators 

Demographic projections for the EU countries 

Increase in age-related expenditure, 2010-2060, % of GDP 

III.1.1. 

Results of the sustainability gap calculations in the baseline scenario (% of GDP) 

III.1.2.  Government structural balances (% of GDP) 

III.1.3. 

III.1.4. 

III.2.1. 

III.3.1. 

Required primary balance (% GDP) 

Projected debt developments 

LTC component of the S2 indicator until 2050 and 2060 

Cost of delaying the response by 5 years 

x 

126 

126 

126 
128 

128 

128 
130 

130 

130 
132 

132 

132 
134 

134 

134 
136 

136 

136 
138 

138 

138 
140 

140 

140 
142 

142 

142 
144 

144 

144 

147 

148 

157 

158 

14 

23 

29 

35 

38 

39 

40 

42 

43 

 
 
 
IV.1.1. 

The effects on the level of real GDP per capita of the three post-crisis scenarios 

IV.1.2. 

Sustainability calculations under alternative crisis scenarios 

IV.2.1. 

Effect of the MTO balance on the S2 indicator and required primary balance 

(RPB) 

IV.3.1. 

Sensitivity scenarios, difference in S2 indicator compared to the baseline 

scenario 

IV.3.2. 

Sensitivity scenarios, difference in S2 indicator compared to the baseline 

scenario 

IV.3.3. 

Sensitivity scenarios, difference in S2 indicator compared to the baseline 

scenario 

V.1.1.  General government gross debt ratio 

V.1.2.  General government financial assets as a share of GDP 

V.1.3. 

V.2.1. 

V.3.1. 

Structural primary balances as a share of GDP 

Benefit ratio – 

Public interventions in the banking sector as a share of GDP 

VI.1.1.  Main factors considered in reaching an overall assessment of the public finance 

sustainability risks 

VII.1.1. 

Summary table (Belgium) 

VII.2.1. 

Summary table (Bulgaria) 

VII.3.1. 

Summary table (The Czech Republic) 

VII.4.1. 

Summary table (Denmark) 

VII.5.1. 

Summary table (Germany) 

VII.6.1. 

Summary table (Estonia) 

VII.7.1. 

Summary table (Ireland) 

VII.8.1. 

Summary table (Greece) 

VII.9.1. 

Summary table (Spain) 

VII.10.1.  Summary table (France) 

VII.11.1.  Summary table (Italy) 

VII.12.1.  Summary table (Cyprus) 

VII.13.1.  Summary table (Latvia) 

VII.14.1.  Summary table (Lithuania) 

VII.15.1.  Summary table (Luxembourg) 

VII.16.1.  Summary table (Hungary) 

VII.17.1.  Summary table (Malta) 

VII.18.1.  Summary table (The Netherlands) 

VII.19.1.  Summary table (Austria) 

VII.20.1.  Summary table (Poland) 

VII.21.1.  Summary table (Portugal) 

VII.22.1.  Summary table (Romania) 

VII.23.1.  Summary table (Slovenia) 

VII.24.1.  Summary table (Slovakia) 

VII.25.1.  Summary table (Finland) 

VII.26.1.  Summary table (Sweden) 

VII.27.1.  Summary table (United Kingdom) 

A.II.1.1.  Property income (% of GDP) 

LIST OF GRAPHS 

II.1.1. 

II.1.2. 

II.1.3. 

II.1.4. 

Life expectancy at birth, 1960 to 2008, selected countries (males and females) 

Fertility rates, 1960-2008, selected Member States 

Population pyramids (in thousands) for EU27 in 2008 and 2060 

Projected change of main population groups (in % change over the period 

2008-2060) 

50 

53 

54 

58 

63 

65 

71 

72 

72 

74 

78 

87 

93 

95 

97 

99 

101 

103 

105 

107 

109 

111 

113 

115 

117 

119 

121 

123 

125 

127 

129 

131 

133 

135 

137 

139 

141 

143 

145 

160 

22 

22 

23 

25 

xi 

 
 
 
II.1.5. 

II.1.6. 

Population of working-age and total employment, EU27 

Decomposition of GDP growth, EU27, ( annual average growth rate) 

III.1.1. 

Decomposition of the S2 indicator 

III.1.2.  Gross debt (% of GDP) 

III.2.1. 

S2 indicator in the baseline scenario compared to the results of the 2006 

Sustainability Report 

IV.1.1. 

Potential GDP growth compared: different crisis scenarios (annual % change) 

IV.1.2. 

Potential impact of the budgetary crisis on pensions 

IV.1.3. 

The potential budgetary impact of the crisis on total age-related expenditure 

IV.1.4. 

The dynamics of public pension expenditure (baseline versus lost decade 

scenario, % of GDP) 

V.2.1. 

Expenditure of non-public occupational, private mandatory and non-

mandatory pension (% of GDP) 

V.4.1. 

Receipts and spending as a share of GDP 

VI.1.1.  Overall risk classification and the sustainability gaps (S2 and S1 in the baseline 

scenario) 

VII.1.1.  Determinants of fiscal sustainability (Belgium) 

VII.2.1.  Determinants of fiscal sustainability (Bulgaria) 

VII.3.1.  Determinants of fiscal sustainability (The Czech Republic) 

VII.4.1.  Determinants of fiscal sustainability (Denmark) 

VII.5.1.  Determinants of fiscal sustainability (Germany) 

VII.6.1.  Determinants of fiscal sustainability (Estonia) 

VII.7.1.  Determinants of fiscal sustainability (Ireland) 

VII.8.1.  Determinants of fiscal sustainability (Greece) 

VII.9.1.  Determinants of fiscal sustainability (Spain) 

VII.10.1.  Determinants of fiscal sustainability (France) 

VII.11.1.  Determinants of fiscal sustainability (Italy) 

VII.12.1.  Determinants of fiscal sustainability (Cyprus) 

VII.13.1.  Determinants of fiscal sustainability (Latvia) 

VII.14.1.  Determinants of fiscal sustainability (Lithuania) 

VII.15.1.  Determinants of fiscal sustainability (Luxembourg) 

VII.16.1.  Determinants of fiscal sustainability (Hungary) 

VII.17.1.  Determinants of fiscal sustainability (Malta) 

VII.18.1.  Determinants of fiscal sustainability (The Netherlands) 

VII.19.1.  Determinants of fiscal sustainability (Austria) 

VII.20.1.  Determinants of fiscal sustainability (Poland) 

VII.21.1.  Determinants of fiscal sustainability (Portugal) 

VII.22.1.  Determinants of fiscal sustainability (Romania) 

VII.23.1.  Determinants of fiscal sustainability (Slovenia) 

VII.24.1.  Determinants of fiscal sustainability (Slovakia) 

VII.25.1.  Determinants of fiscal sustainability (Finland) 

VII.26.1.  Determinants of fiscal sustainability (Sweden) 

VII.27.1.  Determinants of fiscal sustainability (United Kingdom) 

LIST OF BOXES 

IV.1.1. 

Estimating the impact on pension spending of changes in macroeconomic 

variables. 

IV.2.1.  Medium-term debt projections under alternative consolidation scenarios 

IV.3.1. 

Scenario on postponing retirement 

xii 

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36 

40 

42 

49 

51 

51 

52 

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EDITORIAL 

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,  coordinated  in  the  context  of  the  European 
Economic  Recovery  Plan  (EERP),  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, followed by a gradual recovery in 2010.  

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,  very  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 large increases in expenditure on 
debt interest and public pensions, 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 recovery and balanced economic growth in the longer run. 

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. 

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 budgetary frameworks. In the Stability and Growth Pact context, 
debt sustainability should get a very prominent and explicit role in surveillance procedures. 

Marco Buti 
Director General 
Economic and Financial Affairs 

xiii 

 
 
 
 
 
 
 
EXECUTIVE SUMMARY 

Alongside  households  and  firms,  governments  too  have  to  meet  their 
financial obligations over time. The concept of the sustainability of the public 
finances concerns the ability of a government to finance its current debt and 
expected  expenditure.  There  is  no  one  clear-cut  definition  of  a  sustainable 
fiscal  position;  instead  there  are  alternative  theoretical  and  practical 
approaches  to  assessing  the  sustainability  of  public  finances.  In  general,  it 
can be stated that, at first instance, a sustainable position involves a debt level 
that does not entail interest payments so large that they cannot be paid. Thus, 
the sustainability of the public finances considers the ability of a government 
to  service  the  costs  of  its  debt  through  future  revenues.  Sustainability  of 
public  finances  is  therefore  a  long-term  concept  and  differs  from  solvency 
which  is  concerned  with  the  immediate  (short  run)  ability  of  a  country  to 
finance its expenditure.  

This  report  takes  into  account  the  crisis  context  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, it provides a timely input at a stage where 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. 

The  fiscal  costs  of  the  crisis  and  of  projected  demographic  developments 
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.  

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  structural  fiscal  position.  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. On the other hand, the crisis 
may  constitute  a  structural  break  in  our  economies  and  have  a  protracted 
impact on the way these economies will grow over the next decades.  

Population  ageing  is  a  phenomenon  that  the  Member  States  are  already 
familiar  with,  but  whose  consequences  are  yet  to  be  felt  in  full  force. 
Already,  the  European  Union  has  experienced  an  ageing  of  its  population 
through  an  increase  in  life  expectancy  and  a  fall  in  fertility  rates.  Over  the 
next  50  years  the  EU  population  is  expected  to  age  further  –  this  will  have 
consequences for  the  public finances  and  their  sustainability.  The  economic 
and  budgetary  consequences  of  the  expected  change  in  population  structure 
stem mainly from a reduction in the working age population and an increase 

1 

 
 
European Commission 

Sustainability Report - 2009 

2 

in  the  number  of  elderly  people  requiring  support.  A  lower  number  of 
economically active people leads to lower economic growth and lower taxes, 
while a higher number of retired people entails additional public provision of 
age-related transfers and services.  

On the basis of current policies, age-related public expenditure is projected to 
increase on average by 4.3 percentage points of GDP by 2060 in the EU. The 
increase is mainly due to pension, healthcare and long-term care spending. As 
there are significant differences in both the structure of ageing and the social 
security  systems  that  provide  support  for  the  elderly  across  the  Member 
States, the projected increase in public expenditure also varies by country.  

In  order  to  asses  the  sustainability  of fiscal  policy  in  each  Member  State,  a 
number  of  indicators  have  been  developed.  In  general,  these  indicators 
assume  a  continuation  of  current  revenue  and  expenditure  policies  over  a 
finite  or  infinite  timescale,  usually  taking  the  expected  development  of 
population size and structure into account. More specifically, these indicators 
reflect  the  projected  development  of  main  tax  revenues  (usually  direct  and 
indirect taxes and social contributions) and expenditure (i.e. pensions, health 
care, long-term care etc.) under current policy over a very long horizon. The 
sustainability  indicators  quantify  the  gap  that  must  be  closed  to  ensure  the 
public obligations can be financed in the future.  

In  this  report  –  in  line  with  previous  assessments  –  two  main  sustainability 
gap  indicators  are  derived:  the  S1  and  S2  indicators.  Both  S1  and  S2  show 
the size of the permanent budget adjustment required to ensure that the public 
budget  constraints  are  met.  The  S1  indicator  shows  the  adjustment  to  the 
current primary balance required to reach a target government gross debt of 
60% of GDP in 2060, including paying for any additional expenditure arising 
from  an  ageing  population.  The  S2  indicator  shows  the  adjustment  to  the 
current  primary  balance  required  to  fulfil  the  infinite  horizon  intertemporal 
budget  constraint,  including  paying  for  any  additional  expenditure  arising 
from  an  ageing  population.  Thus,  the  difference  between  S1  and  S2  is  the 
length  of  the  time  horizon  taken  into  account  when  assessing  the 
sustainability of the public finances. In both cases, non-age related and non-
interest  spending  is  assumed  to  remain  constant  as  a  share  of  GDP  in  the 
relevant time period. In addition to those two indicators, the required primary 
balance (RPB) is also used to illustrate the sustainability situation. The RPB 
indicates  the  starting  budgetary  position  which,  if  attained,  ensures  the 
sustainability of the public finances under no policy change assumptions. The 
RPB  can  then  be  used  to  compare  the  actual  or  planned  budgetary  strategy 
with  the  structural  primary  balance  required  for  fulfilling  the  inter-temporal 
budget  constraint.  The  major  inputs  into  S1,  S2  and  RPB  indicators  are  the 
current  levels of gross  government  debt,  the  structural  primary  balance  (i.e. 
public  budget  balance  excluding  interest  payments  on  public  debt,  cyclical 
factors  and  one-off  transactions)  and  the  expected  additional  costs  arising 
from population ageing. 

A positive value of the gap indicators like S1 and S2 signifies the permanent 
adjustment to the fiscal policy that is necessary to ensure sustainability. The 
analysis is undertaken on the basis of current policy continuing in the future; 
this  does  not  imply  that  it  is  realistic  to  assume  that  these  policies  will 
continue,  but  serves  to  quantify  the  necessary  magnitude  of  the  change  in 

 
Executive summary 

policy  in  order  to  inform  the  debate.  Indeed,  the  greater  the  value  of  the 
indicator the greater adjustment that is required to restore the sustainability of 
public budgets. On the contrary, a negative value indicates that fiscal policy 
is sustainable. The value of S1 and S2 can be further decomposed into parts 
characterising  the  required  adjustment  given  the  initial  budgetary  position 
(IBP), required adjustment given the long-term change in expenditure (LTC) 
and, in case of S1, the effect of the starting level of debt relative to the 60% 
target  for  2060  (DR)  to  allow  consideration  and  comparison  of  the 
contribution these components make to sustainability. Still, the indicators do 
not  in  themselves  provide  any  guide  as  to  how  the  adjustment  should  take 
place  as  the  necessary  adjustments  could  occur  as  result  of  an  increase  in 
government receipts or a reduction in its spending, or structural reforms. 

The value of the S2 indicator shows a sustainability gap of 6.5% of GDP for 
the  whole  EU  and  of  5.8%  of  GDP  for  the  euro  area,  albeit  with  wide 
variation between countries. The S1 indicator shows a sustainability gap for 
the  EU  countries  and  for  the  euro  area,  of  5.4%  and  4.8%  of  GDP 
respectively.  The  decomposition  results  show  that  for  the  EU-27  countries, 
the IBP is responsible for 3.3 points of the S2 gap and 3.1 points for the S1 
gap.  This  means  that  even  without  taking  the  cost  of  ageing  into  account,  
that  is  assuming  that  age-related  expenditure  in  government  accounts 
remained constant as a share of GDP, European countries should tighten their 
fiscal  stance  (in  terms  of  the  structural  primary  balance)  by  an  average  of 
3.3% of GDP, or adopt structural reforms, for their public finances to return 
to  a  sustainable  path.  The  long  term  cost  of  ageing  (LTC)  contributes  3.2 
points to the S2 gap and 2 points to the S1 gap, with the figures being 3.5 and 
2.4  points  respectively  for  the  euro  area.  This  shows  that  the  LTC  has  a 
significant fiscal impact on average. For the S1 gap, the requirement to reach 
a debt level of 60% of GDP by 2060 (DR) adds an adjustment of 0.2 points 
for the EU-27 and 0.3 points for the euro area. 

Overall,  the  baseline  results  in  this  report  differ  significantly  from  those 
presented three years ago in the 2006 Sustainability Report. While the EU-25 
average sustainability gap was estimated at 3.4% of GDP on S2, the current 
estimates  are  for  6.5%  of  GDP.  On  average,  the  sustainability  gap  has 
increased by 3.1% of GDP for the 25 countries that were members of the EU 
in 2006. While four Member States (Hungary, Portugal, Italy and Germany) 
show  a  lower  sustainability  gap  than  in  the  2006  exercise,  the  remaining 
Member  States  show  deterioration.  Of  these,  in  all  cases  expect  Greece, 
Luxembourg  and  Malta,  the  deterioration  is  essentially  due  to  the  crisis-
related weakening of the initial budgetary position rather than to an increase 
in the age-related costs and the delay in the required adjustment that leads to 
a higher LTC. For Spain, Greece, Ireland, Latvia and the UK the weakened 
initial  budgetary  position  is  responsible  for  an  increase  of  the  estimated 
sustainability gap of over 5% of GDP.  

The  financial  and  economic  crisis  has  added  to  countries'  sustainability 
difficulties,  through  the  significantly  worse  than  expected  macro-economic 
and fiscal developments in 2008 and 2009 it has led to. In addition, there is 
marked uncertainty regarding economic growth in the medium and long-term 
perspective.  As  a  consequence,  a  number  of  alternative  macroeconomic 
scenarios were produced to look at the impact of the crisis. In a lost decade 
scenario, pension expenditure is 0.9% of GDP higher in 2060 relative to the 

3 

 
 
European Commission 

Sustainability Report - 2009 

4 

baseline, while total age related expenditure is 1.4% of GDP higher, with the 
most of the increases occurring between 2007 and 2020.  

Although the crisis has added to the sustainability problems, the recovery is 
not likely to solve all the difficulties on its own. For some Member States the 
current  deficits  may  return  to  surplus  when  the  recovery  comes,  but  where 
this is not the case budgetary consolidation will be necessary and should be 
undertaken as soon as the time is right in order to reduce long-term risks to 
public  finance  sustainability.  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 reached 
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. Exit strategies 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.   

Of course, the estimates presented in the report are partly determined by the 
underlying assumptions made. To assess the robustness of the sustainability 
indicators and to better understand the long-term sustainability risks in each 
country,  the  Sustainability  Report  quantifies  the  impact  of  changes  in  main 
assumptions  on  the  sustainability  indicators.  In  particular,  alternative 
assumptions  are  presented  for 
labour  productivity, 
participation  of  older  workers  in  the  labour  market,  total  employment, 
migration  and  the  interest  rate.  For  all  these  elements  there  is  considerable 
uncertainty  when  predicting  into  the  future,  so  considering  the  response  of 
sustainability  results  to  the  underlying  assumptions  is  important.  Again,  the 
final  change  of  S2  as  a  response  to  a  change  in  some  of  the  mentioned 
parameters may differ country-by country as eligibility and indexation rules 
for age related expenditure are country specific. 

life  expectancy, 

On  the  basis  of  the  sustainability  indicators,  as  well  as  a  number  of  other 
factors (including debt and assets, average pensions and tax burden), the EU 
Member States are classified in three categories depending on the degrees of 
long-term  risk  they  face.  Overall,  only  five  countries  are  classified  as  low-
risk countries, nine countries are classified as facing medium long-term risk, 
while thirteen countries are  exposed to higher long-term risks. 

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.  Note, 
however,  that  the  projections  for  Bulgaria  and  Estonia  do  not  include  any 
strengthening  of  social  protection  in  the  coming  decades  that  may  be 
necessary for their systems to converge with other EU countries. In Finland, 
the projected increase in expenditure is substantial and the fiscal cost of the 

 
Executive summary 

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.  

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.  In  general,  for  this  group  of  countries, 
the  long-term  sustainability  risk  is  medium.  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  social  sustainability  by  increasing  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 ratio.  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. 

The  Czech  Republic,  Cyprus,  Ireland,  Greece,  Spain,  Latvia,  Lithuania, 
Malta,  the  Netherlands,  Romania,  Slovenia,  Slovakia  and  the  United 
Kingdom have sustainability gaps 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  higher  long-term 
risks.  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 
countries  exposed  to  high  long-term  sustainability  risks  –  in  particular, 

5 

 
 
Ireland,  Greece,  Latvia,  Spain  and  United  Kingdom  –  for  whom  avoiding 
exponentially  increasing  debts  is  a  policy  challenge  already  in  a  medium-
term perspective. 

The  report  is  structured  as  follows.  Chapter  I  introduces  the  concept  of 
sustainability  and  discusses  how  it  will  be  measured.  It  introduces  the 
additional  difficulties  that  demographic  changes  and  the  fiscal  costs  of  the 
crisis  poses  to  sustainability.  Chapter  II  presents  data  on  projected 
demographics in the EU for the years until 2060, and the projected increases 
in  a  number  of  age-related  expenditure  categories.  Chapter  III  presents  the 
results of the sustainability analysis in the form of the S1 and S2 indicators 
and breaks the results down in their constituent parts. It compares the results 
with those presented in the 2006 Sustainability Report and considers the cost 
of  delaying  action.  Chapter  IV  considers  the  effect  that  the  economic  crisis 
might have on sustainability and by presenting the effect that alternative post-
crisis  macroeconomic  scenarios  might  have.  It  considers  the  impact  that 
consolidation  in  line  with  the  existing  medium  term  budgetary  objectives 
would  have,  if  undertaken  once  the  economies  are  firmly  in  the  recovery 
phase. Finally it presents a sensitivity analysis which considers how different 
underlying assumptions would affect the value of the S2 indicator. Chapter V 
discusses  other  factors  that  affect  sustainability  but  which  do  not  directly 
enter  the  calculation  of  the  indicators.  These  are  the  additional  risk  of  debt 
and the value of government assets, the level of pensions and the social and 
political risks that these may entail, the role of contingent liabilities and the 
implications that different levels of existing tax ratios have for governments' 
policy  choices.  Chapter  VI  presents  an  overall  classification  of  countries 
according  to  the  long-term  sustainability risks  that  they  face,  while  detailed 
data,  and  discussion  of  the  results,  for  each  Member  State  is  set  out  in 
Chapter VII. 

European Commission 

Sustainability Report - 2009 

6 

 
 
 
 
Chapter I 
Sustainability of public finances 

 
 
strong.  The  sustainability  indicators  also  provide 
information  on  the  cost  that  would  result  from  a 
delay  in  addressing  the  long-term  sustainability 
issues.  

in  age-related  expenditure  from 

The  analysis  in  this  report  uses  the  projected 
changes 
the 
Commission  and  EPC’s  2009  Ageing  Report.  It 
considers  the  additional  expenditure  on  pensions, 
healthcare  and  long-term  care  that  population 
forecasts entail, as well as the potentially offsetting 
effect  of  changes  to  education  expenditure  and 
unemployment  benefits.  The  different  social 
protection  structures  and  demographic  trends  of 
the  Member  States  mean  that  such  expenditure  is 
expected  to  evolve  in  very  different  ways  across 
countries. 

that 

already 

approved 

The  analysis  undertaken  in  this  report  takes  the 
2009  fiscal  position  as  a  basis  and  projects  the 
trajectory  of  the  public  finances  on  a  partial 
equilibrium  basis.  All  projections  are  done  on  a 
‘no  policy  change’  assumption,  whereby  it  is 
assumed 
legislation 
continues  to  apply,  but  that  most  tax  receipts  and 
spending stay constant as a share of GDP over the 
long  term.  This  assumption  of  unchanged  polices 
over the whole projection period is not adopted for 
reasons of realism, but because it is the assumption 
that  allows  a  robust  assessment  of  the  required 
remedial  action  to  avoid  that  the  EU  public 
finances  enter  in  an  exponentially  increasing  debt 
spiral. 

SUMMARY 

The crisis-related fiscal expansions and the ageing 
of  European  Union's  population  raise  questions 
about  the  sustainability  of  the  Member  States' 
public  finances.  As  the  share  of  working  age 
people in the population falls and the share of the 
old  increases,  economies  are  faced  with  lower 
economic growth and higher costs associated with 
providing services for the ageing population. This 
results  in  pressure  on  the  public  finances;  bold 
measures  will  be  necessary  to  ensure  that  they 
return to a sustainable footing before the full effect 
of ageing is felt. 

Sustainability relates to the ability of a government 
to assume the financial burden of its debt currently 
and  in  the  future.  While  there  is  no  one  clear-cut 
definition  of  a  sustainable  fiscal  position,  this 
chapter  defines  two  sustainability  gap  indicators 
which are most widely used in the EU to measure 
the  sustainability  challenges  that  Member  States 
face. These are: 

The  S1  indicator  shows  the  durable  adjustment  to 
the  current  primary  balance  required  to  reach  a 
target  debt  of  60%  of  GDP  in  2060,  including 
paying for any additional expenditure arising from 
an ageing population. 

The S2 indicator shows the durable adjustment of 
the  current  primary  balance  required  to  fulfil  the 
infinite  horizon  intertemporal  budget  constraints, 
including  paying  for  any  additional  expenditure 
arising from an ageing population. 

the  public 

The  sustainability  indicators  quantify  the  required 
permanent  budgetary  adjustment  (e.g.  a  durable 
reduction of non age-related public expenditure as 
a  share  of  GDP  or  a  constant  increase  in  public 
revenue  as  a  share  of  GDP)  to  ensure  the 
sustainability  of 
finances.  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  in  a  long-term  perspective.  They  can  be 
decomposed  into  a  part  that  relates  to  the  starting 
fiscal  position  and  a  part  that  relates  to  the 
additional  costs  of  an  ageing  population. 
Decomposing  them  in  this  way  gives  additional 
information about the nature of the policy response 
that is appropriate. In particular, where the costs of 
ageing  are  a  significant  risk  factor 
the 
sustainability  of  the  public  finances,  the  case  for 
reforming  the  social  protection  systems  becomes 

to 

9 

 
1.  DEFINING SUSTAINABILITY 

1.1.  WHAT IS MEANT BY THE SUSTAINABILITY 

OF THE PUBLIC FINANCES 

The  concept  of  the  sustainability  of  the  public 
finances  relates  to  the  ability  of  a  government  to 
assume  the  financial  burden  of  its  debt  currently 
and going forward. There is no clear-cut definition 
of a sustainable fiscal position, though the concept 
is  rather  intuitive.  At  a  first  instance  it  involves  a 
debt  level  that  does  not  entail  –  either  now  or  in 
the foreseeable future – interest payments so large 
that they cannot be paid.  

is 

to 

look  at 

A  first  way  of  writing  down  the  widest  definition 
the  solvency 
of  sustainability 
condition  for  the  general  government  through  the 
government’s  inter-temporal  budget  constraint.  (1) 
This  considers  the  ability  of  the  government  to 
meet the costs of its debt through future revenues. 
The  intertemporal  budget  constraint  is  satisfied  if 
the  projected outflows of  the  government  (current 
public  debt  and  the  discounted  value  of  all  future 
expenditure,  including  the  projected  increase  in 
age-related  expenditure)  are  covered  by 
the 
discounted value of all future government revenue. 
This  is  equivalent  to  saying  that  the  government 
must  run  sufficiently  large  primary  surpluses 
interest 
(receipts  minus 
payments)  going  forward  to  cover  the  cost  of 
servicing its debt.  

spending  excluding 

The  intertemporal  budget  constraint  is  most  often 
considered  over  an  infinite  horizon  with  no 
implications  about  when  the  primary  surpluses 
should  be  larger  or  smaller,  nor  what  balance  of 
expenditure and receipts they should be driven by. 
Nor does it imply that that the debt should stand at 
a particular finite value at any given point in time. 
As such it could, theoretically, be satisfied by very 
high  levels  of  debt  and,  therefore,  very  high 
interest payments, in the short term or at any time 
horizon,  as  long  as  there  is  reason  to  believe  that 

sufficiently 
achieved afterwards. 

large  primary  surpluses  will  be 

While  the  infinite  horizon  gives  a  comprehensive 
picture of the sustainability of the public finances, 
it can prove weak from a policy point of view due 
to  its  lack of  immediacy  and  raises  issues of  time 
consistency.  Alternatively,  a  finite  version  of  the 
budget  constraint  can  be  defined,  by  setting  a 
target date and a target debt level and considering 
whether and how this can be achieved. The choice 
of  target  date  reflects  the  aim  of  the  exercise  in 
terms  of  how  it  is  expected  to  guide  policy.  By 
picking a short timescale, the requirements placed 
on  the  government  are  stronger  as  there  is  little 
possibility  of  adjusting  the  fiscal  position  in  the 
future to ensure that this budget constraint is met, 
though some challenges (such as the demographic 
developments and potential growth after the target 
date) are disregarded. Conversely, the further away 
the  target  date,  the  more  abstract  the  exercise 
becomes as a guide to policymakers, and the more 
relevant  time  consistency  issues  become.  By 
choosing  too  high  a  target  debt  level,  there  is  the 
possibility  that  sustainability  is  compromised  in 
the  period  beyond  the  target  date,  while  choosing 
too  low  a  debt  level  can  implicitly  impose  an 
undue burden on current taxpayers versus those in 
the  more  distant  future.  In  this  report,  the  target 
date is 2060 – ten years more than 2050, the target 
date  in  the  Commission’s  previous  Sustainability 
Report. (2)  The  target  level  of  debt  is  60 %  of 
GDP,  which  is  the  threshold  for  the  general 
government gross debt in the EC Treaty. 

The  analysis  presented  in  this  report  aims  to 
the  current 
provide  an  estimate  of  whether 
budgetary position in the Member States presents a 
sustainability  gap  going  forward,  once  the  effects 
of  an  ageing  population  are  taken  into  account. 
The  analysis  aims  to  aid  the  understanding  of  the 
choices  the  governments  of  the  Member  States 
face  over  the  long  term  and  to  inform  the  debate 
about  the  magnitude  of  changes  that  need  to  be 
considered.  

(1) 

D
t

0

−

t

∞

∑

10
t
+=

PB
t
)
r
+

t

1(

− =

t

0

0

where Dt0 is gross debt as a share of GDP in the year before 
the  long-term  projections,  PBt  is  the  structural  primary 
balance  (receipts  minus  spending  excluding  debt  interest 
payments)  at  time  t  and  r    is  the  differential  between  the 
nominal interest rate and the nominal GDP growth rate.  

(2)  ‘Long-Term  Sustainability  of  Public  Finances  in  the  EU,’ 
European  Economy,  4/2006  and  respective  Commission 
communication , COM (2006) 574 final, 12 October 2006.  

10 

 
                                                           
 
                                                           
Sustainability of public finances 

Chapter I 

1.2.  DEFINING THE SUSTAINABILITY 

INDICATORS 

deterioration  in  the  primary  balance  could  allow 
the constraint to be met. 

In  this  report  sustainability  is  assessed  using 
current  levels  of  gross  government  debt,  the 
primary  balance  in  structural  terms  (i. e.  the 
cyclically-adjusted  primary  balance  and  removing 
one-off transactions) and expected additional costs 
arising from ageing to see whether an infinite and 
a  finite  version  of 
intertemporal  budget 
the 
constraint  are  met.  The  greater  the  expected  costs 
of  ageing,  the  harder  it  is  for  the  intertemporal 
constraints to be met, other things being equal, as 
the  current  primary  balance  will  need  to  be 
sufficiently  large  to  account  for  these  additional 
future costs. Corresponding to each version of the 
budget  constraint  –  over  an  finite  or  infinite 
horizon  –  two  sustainability  gap  indicators  are 
derived, showing the size of the permanent budget 
adjustment  required  to  ensure  that  the  constraints 
are met.  

The  S1  indicator  shows  the  durable  adjustment  to 
the  structural  primary  balance  required  to  reach  a 
target  debt  of  60%  of  GDP  in  2060,  including 
paying for any additional expenditure from now to 
the target date, arising from an ageing population. 

The choice of the debt target for the S1 indicator is 
in  line  with  the  debt  threshold  in  the  Treaty.  The 
timescale  has  been  chosen  to  be  long  enough  to 
allow  the  impact  of  ageing  to  be  analysed  in  a 
meaningful  way,  while  still  remaining  within  the 
sights of current taxpayers and policy makers. 

The  S2  indicator  shows  the  adjustment  to  the 
structural  primary  balance  required  to  fulfil  the 
infinite  horizon  intertemporal  budget  constraint, 
including  paying  for  any  additional  expenditure 
arising from an ageing population. 

1.3. 

INTERPRETING THE SUSTAINABILITY 
INDICATORS 

The  sustainability  indicators  quantify  the  gap  that 
must  be  closed  to  ensure  the  sustainability  of  the 
public  finances.  The  larger  the  value  of  the  gap 
indicators,  the  greater  is  the  necessary  adjustment 
to  ensure 
to 
sustainability.  A  negative  value  indicates  that  the 
is  met;  even 
intertemporal  budget  constraint 

the  structural  primary  balance 

The indicators do not provide any guide as to how 
the  adjustment  should  take  place.  Although    the 
sustainability  indicators  are  sometimes  referred  to 
as tax gaps, the necessary adjustments could occur 
as  result  of  an  increase  in  government  receipts 
(usually through higher direct or indirect taxes), a 
reduction  in  non  age  related  spending,  or  through 
policy  responses  aimed  at  reducing  the  cost  of 
ageing. The choice of measure, or combination of 
measures,  may  itself  have  an  impact  on  the 
economy or on fiscal sustainability. For example, a 
large  increase  in  the  tax  burden  to  fill  the 
sustainability  gap  may  itself  lead  to  deterioration 
the  economy’s  growth  prospects,  with 
in 
consequences for sustainability. 

The  sustainability  gap  indicators  are  one  way  of 
presenting the results of the sustainability analysis. 
An alternative would be to look at the future level 
of  debt  assuming  no  policy  action  in  response  to 
the sustainability imbalances. This exercise is also 
presented  later  in  the  report,  showing  a  more 
cumulative  or  ‘stock  assessment’  of  the  challenge 
faced by each Member State. 

if 

ensures 

attained, 

to  present 

The  required  primary  balance  (RPB)  is  another 
indicator  used 
the  sustainability 
situation. The RPB indicates the starting budgetary 
position  which, 
the 
sustainability  of  the  public  finances  under  no 
policy  change  assumptions.  Unlike 
the  S2 
indicator,  it  is  a  level  for  the  budgetary  position, 
rather  than  a  gap.  It  is  important  to  note  that  the 
RPB is not a static indicator. For a country that has 
reached  its  RPB  (so  with  a  S2  gap  which  is  zero 
and  which  is projected  to remain  zero),  the  actual 
and  required  primary  balance  will  progressively 
deteriorate  given  the  increase  in  ageing-related 
expenditure, though sustainability is ensured. 

Where the actual (or planned for the medium term) 
budgetary  balance  is  equal  or  more  positive  than 
the  RPB,  the  public  finances  are  sustainable.  The 
opposite  is  true  where  the  actual  or  planned 
budgetary balance is smaller or more negative than 
the  RPB.  In  practice,  the  RPB  is  often  calculated 
as the projected average structural primary balance 
over several years. In this report it is given for the 
first  five  years  after  the  Commission  Spring  2009 
forecast horizon (2011–15). Like the sustainability 

11 

 
European Commission 

Sustainability Report - 2009 

gaps  (S1  and  S2),  the  RPB  does  not  provide  firm 
guidance  on  which  policy  measures  (such  as  tax 
increases,  spending  cuts  or  reforms  in  social 
protection)  are  required  to  return  to  sustainable 
public  finances.  However,  when  the  RPB  is  so 
large  that  it  is  not  realistic,  medium-term  fiscal 
consolidation  via  tax  or  spending  measures  will 
not  be  enough  and  reform  of  the  demographic-
driven 
(notably  public 
pensions and healthcare) appear indispensable. 

spending  categories 

1.4.  OTHER CONCEPTS OF SUSTAINABILITY 

Depending  on  the  public  policy  interest,  other 
concepts  of  sustainability  exist.  For  example, 
concepts  of  political  or  social  sustainability  or  of 
inter-generational equity would be assessed using a 
different  approach  to  that  pursued  in  this  report. 
Debt  involves  the  deferral  of  payments  to  future 
taxpayers and restricts choice about how to spend 
the  products  of  their  labour  and  investment. 
Questions 
equity, 
therefore,  also  need  to  be  considered  by  policy 
makers.  It  might,  for  example,  be  informative  to 
look at the marginal benefit to future taxpayers of 
the  expenditure  financed  through  debt  whose 
repayment may fall on them. For small economies 
the  currency 
outside 
denomination  of  debt  and  whether  debt  is  held 
internally or externally may also be important. 

the  monetary  union, 

inter-generational 

about 

Moreover, while a given level of debt may not be 
unbearable, the budgetary pressures caused by the 
debt  burden  can  create  political  incentives  for 
governments  to  default  on  their  debt,  either 
explicitly  or  through  inflation.  The  EU,  and  in 
particular, the euro area countries, is well equipped 
to  resist  pressures  to  inflate  away  government 
debts. 

12 

 
2.  DERIVING THE SUSTAINABILITY INDICATORS 

The sustainability indicators, S1 and S2, show the 
gap  between 
the  current  budgetary  position 
expressed  in  terms  of  the  structural  balance  and 
that required to ensure sustainability.  

Table  II.2.1  breaks  the  indicators  down  into  the 
three factors that the gap depends on, and the three 
corresponding  components  of  the  indicators.  It 
shows  that  the  initial  budgetary  position  and  the 
long  term  costs  of  ageing  affect  both  indicators 
directly,  while  the  S1  indicator  is  also  directly 
affected by the starting level of debt relative to the 
60%  target  for  2060.  In  the  results  shown  in  later 
sections  of  this  report,  the  contribution  of  these 
three components is considered in detail. 

2.1. 

REQUIRED ADJUSTMENT GIVEN THE 
INITIAL BUDGETARY POSITION 

if 

the 

the 

increase 

in  government 
Irrespective  of 
expenditure  due 
to  projected  demographic 
developments,  the  public  finances  of  a  given 
initial 
country  may  be  unsustainable 
structural  primary  balance,  the  projected  interest 
payments  and  economic  growth  imply  an  ever 
increasing debt ratio. Thus, the first component of 
the  S1  and  S2  indicators  corresponds  to  the  gap 
between  the  initial  structural  primary  balance  and 
surplus.  This 
the 
component 
the  required 
adjustment given the initial budgetary position, or 
simply IBP. (3) 

debt-stabilising 
is 

referred 

primary 

to  as 

to  consider 

In order to correctly account for the contribution of 
the  budget  balance  at  the  starting  year,  it  is 
fiscal 
important 
position,  rather  than  the  actual  value  of  the 
government  surplus  or  deficit  published  by  the 
statisticians.  This  means  adjusting  the  starting 
balance  for  the  effect  of  the  business  cycle  and 
temporary  measures,  such  as  one-off  expenditure 

the  underlying 

(3)  As the size of this component depends on expected growth 
and  interest  rates,  it  is  not  necessarily  the  case  that  it  will 
have  the  same  magnitude  in  the  S1  and  S2  indicators,  as 
expected  growth  and  interest  rates  might  vary  over  time. 
However, in practice IBP (S1) an IBP (S2) are quite close 
to  each  other.  Moreover,  also  because  of  the  expected 
movements in growth and interest rates, including those of 
a cyclical nature, the concept of ‘debt stabilisation’ should 
be  understood  in  a  long-term  perspective  and  not  year  by 
year. 

and revenues, to derive the structural balance. This 
report  usually  uses  the  forecasts  for  2009,  as 
published  in  the  European  Commission  2009 
spring  Forecasts,  for  the  starting  position  of  the 
both the structural balance and debt level. 

the 

Correctly estimating the structural balance requires 
an  estimation  of  the  position  of  the  economic 
activity  relative  to  its  potential,  the  so-called 
output  gap,  and  an  estimation  of  the  effect  of  the 
economic  cycles  on  government  revenues  and 
spending. (4)  Cyclical  adjustment  always  entails  a 
certain  level  of  imprecision.  However,  under  the 
current circumstances, with the European economy 
in  the  early  phases  of  recovery  after  a  deep 
inherent 
financial  and  economic  crisis, 
difficulties are unusually large. First, it is difficult 
to correctly judge the position of the output gap. In 
the 
the 
light  of  possible  structural  changes, 
potential output of today, as well as its trajectory in 
the  future  contains  a  substantial  element  of 
uncertainty. These factors act to compound the fact 
that tax elasticities tend to vary over the economic 
cycle and that they are implicitly affected by asset 
price  changes  which  are  difficult  to  model  or 
predict. The nature of the crisis has been such that 
the  element  of  uncertainty  linked  to  judging  the 
initial  budgetary  position  and  its  contribution  to 
particular 
time 
sustainability 
significance.   

over 

of 

is 

The  forecast  trajectory  of  economic  growth  over 
the  medium-  and  long-term  is  a  crucial  factor  in 
determining  the  impact  of  the  initial  budgetary 
position  and  debt  on  sustainability,  and 
the 
required  adjustment  given  the  initial  budgetary 
position. As this trajectory is particularly uncertain 
given  the  economic  and  financial  crisis,  Chapter 
IV 
the 
sustainability indicators under alternative scenario. 

alternative 

estimates 

derives 

for 

(4)  Cycles  in  assets  prices  may  also  be  relevant  in  estimating 
they  are  usually  not 
in  most  structural  adjustment 

the  structural  balance, 
considered  explicitly 
methods. 

though 

13 

 
                                                           
                                                           
European Commission 

Sustainability Report - 2009 

Table I.2.1: 

Summarising the indicators 

 Required adjustment given the 
initial budgetary position (IBP)

Gap to the debt-stabilising 
primary balance

Gap to the debt-stabilising 
primary balance

Required adjustment to reach 
debt to GDP ratio of 60% in 
2060 (DR)
Additional adjustment required 
to reach a debt target of 60% 
of GDP in 2060

0

+

+

S1=

S2=

+

+

Required adjustment due to 
long-term changes in the 
primary balance (LTC)
Additional adjustment required 
to finance the increase in 
public expenditure due to 
ageing up to 2060

Additional adjustment required 
to finance the increase in 
public expenditure due to 
ageing over an infinite horizon

Source: Commission services 

2.2. 

THE DEBT REQUIREMENT BY 2060 

gross  debts  of  several  countries  are  increasing 
much faster than implicit by the deficit (5). 

the 

through 

indicators 

The  starting  level  of  debt  enters  the  definition  of 
both 
initial  budgetary 
position,  as  it  determines  the  size  of  interest 
payments  on  government  debt  that  must  be 
covered.  In  the  case  of  the  S1  indicator  only,  the 
size  of  adjustment  required  also  directly  depends 
on  the  debt  requirement  set  at  end  of  the  time 
period (60% of GDP in 2060). For countries with 
starting government gross debt above 60% of GDP 
the required adjustment to reach the target debt by 
2060  (DR)  term  will  increase  the  size  of  the 
indicator  as  the  effort  of  debt  reduction  by  2060 
needs to be considered. For countries with current 
debt  of  below  60%,  the  DR  component  will  be 
negative and reduce the S1 indicator.  

The current financial and economic crisis, adds an 
element of uncertainty to the DR estimate too. The 
estimates  presented  later  in  the  report  use  debt 
from  2009  as  the  base.  Yet  with  the  historically 
large  deficit  ratios  being  recorded  in  several 
European  countries,  in  some  cases  up  to  10%  of 
GDP, the increase in debt likely to be seen over the 
next  couple  of  years  could  lead  to  very  different 
the  debt 
estimates  of 
component  to  the  S1  indicator.  Moreover,  the 
accumulation  of  financial  assets  –  such  as  shares, 
other  equity  or  loans,  as  part  of  the  bail  out  of 
banks and other entities heavily hit by the crisis – 
by  governments  also  implies  that  the  government 

the  contribution  of 

14 

2.3. 

THE REQUIRED ADJUSTMENT GIVEN THE 
INCREASE IN AGE-RELATED COSTS 

changes 

long-term 
(or 

simply,  LTC).  The 

Finally,  both  S1  and  S2  include  a  component 
which corresponds to the required adjustment due 
in  government 
to 
the 
third 
expenditure 
component  of  both  indicators  is  the  additional 
adjustment  required  as  a  result  of  these  expenses 
either  to  2060  or  over  an  infinite  horizon.  The 
magnitude of the LTC component depends on both 
the  demographic  outlook  for  countries  and  their 
social 
arrangements.  The  LTC 
component represents either the change required to 
pay  for  the  additional  expenses  or  the  size  of  a 
structural  reform (6)  to  social  protection  schemes 
to avoid the increase that would otherwise ensue. 

protection 

The  size  of  this  component  is  likely  to  vary 
between  the  S1  and  S2  indicators.  The  larger  the 
part  of  the  expected  ageing  of  the  population  that 
is  to  occur  in  the  short-  rather  than  medium-term 

(5)  See  European  Commission  (2009),  ‘Public  Finances  in 
EMU-2009’, chapter II-1, European Economy, 5, for more 
details  on  how  government  transactions  to  bail  out  banks 
and  other  entities  hit  by  the  crisis  are  recorded  in 
government  accounts  –  in  particular  with  respect  to  the 
government  deficit  and  debt.  See  also  Eurostat  News 
Release  103/2009  of  15  July  2009:  ‘The  statistical 
recording  of  public  interventions  to  support  financial 
institutions  and  financial  markets  during  the  financial 
crisis.’  

(6)  The size of a structural reform to social protection schemes 
(such  as  public  pensions  and  healthcare)  means  here  the 
discounted  sum  of  the  spending  savings  implied  by  that 
reform. 

 
                                                           
 
 
future,  the  larger  the  impact  on  the  S1  indicator 
relative to the S2 indicator. Conversely, if the costs 
of an ageing population are mainly borne closer to 
2060  than  now,  the  larger  the  relative  impact  of 
ageing on the S2 indicator.  

The  economic  crisis  has  an  impact  on  LTC  in  so 
far as the crisis leads to a durable fall in potential 
growth,  and  indirectly  on  several  government 
outlay that somehow depend on growth. Moreover, 
the  shock  to  asset  prices  and  asset  returns  also 
impact  on  the  net  costs  of  providing  pension  for 
the pension schemes that control large assets. 

2.4. 

POLICY IMPLICATIONS 

The  decomposition  of  the  indicators  allows  an 
analysis  of  the  driving  forces  behind  the  results 
summarised  by  the  indicators.  The  same  overall 
sustainability  gap  may  be  the  result  of  either  the 
current  fiscal  position  (see  IBP),  the  level  of  debt 
(see DR) or the expected increase in ageing-related 
expenditure  (see  LTC).  In  relation  to  the  latter, 
comparing LTC components in S1 and S2 (i.e. the 
finite-  and 
the 
sustainability indicators) also allows identification 
of  the  urgency  in  addressing  the  demographic-
related sustainability issues. 

infinite-horizon  versions  of 

requires 

response 

An  optimal  policy 
an 
understanding  of  these  issues.  For  example,  a 
sustainability  gap  arising  primarily  from  an 
imbalanced 
initial  budgetary  position  being 
insufficient  or  one  that  is  insufficient  to  stabilise 
debt  might  be  easier  to  rectify  politically  through 
tax  increases  or  spending  cuts,  than  one  due 
primarily to the costs of ageing. In the latter case, 
costs  on  government  budgets  might  only  become 
directly  visible  in  the  future  and  anticipatory 
remedial  action  may  be  more  difficult 
to 
fiscal 
implement.  The  overall  efficiency  of 
consolidation approach (increasing taxes or cutting 
expenditure)  or  of  approaches  based  on  structural 
reforms  of  social  protection  also  depends  on  the 
source  (IBP,  DR  or  LTC)  of  the  sustainability 
imbalances. 

Sustainability of public finances 

Chapter I 

15 

 
 
3. 

ESTIMATING THE COST OF AGEING 

3.1. 

PROJECTING AGE-RELATED EXPENDITURE 

An ageing population puts pressure on a country’s 
finances primarily through its effects on the labour 
market  and  hence  economic  growth  and  age-
related  expenditure.  With  fewer  people  being  of 
working  age,  the  potential  growth  rate  of  the 
economy is reduced. These changes affect each of 
the  components  of  the  S1  and  S2  indicators, 
through changes in the estimated rate of economic 
growth.  

The direct costs of ageing involve increases in age-
related expenditure. This report uses the estimates 
of  the fiscal  impact  of  these  changes  as presented 
in  the  2009  Ageing  Report.  (7)  As  the  aim  is  to 
provide  an  estimate  of  the  long-term  effect  on 
sustainability  of  ageing,  the  analysis  takes  the 
figures  for  age-related  costs  starting  in  2010.  The 
projections  are  made  on  a  basis  of  no-policy 
change  assumption  where  it  is  assumed  that 
current tax and spending arrangements continue in 
the future.   

The  Ageing  Report  considers  the  public  cost  of 
ageing  using  five  expenditure  categories.  This 
report  uses 
these 
categories to quantify the impact of ageing on the 
sustainability of the public finances. 

the  projected  changes 

to 

Public  pensions'  expenditure  increases  with  an 
older population. This category consists of old age 
pensions  and  survivors'  pensions,  early  retirement 
funding, various disability benefits and other items 
of  public  expenditure  that  provide  support  for 
those  unable  to  work.  The  extent  to  which  such 
expenditure  increases  depends  on  both  the  degree 
of ageing – the number of retirees and the average 
length  in  retirement,  which  is  directly  linked  with 
longevity  –  but  also  very  significantly  on  the 
retirement age and the structure of the pension and 
support  systems  in  place.  Such  systems  typically 
constitute  a  significant  portion  of  the  public 
budget, but their structures vary widely, in terms of 

(7)  ‘2009  Ageing  Report’  joint  report  of  the  European 
Commission  and  the  EPC,  European  Economy,  2,  and 
Commission  Communication  ‘Dealing  with  the  Impact  of 
an  Ageing  Population  in  the  EU,’  COM  (2009)  180  final, 
21 April 2009. 

16 

their  current  generosity  and  of  their  dynamic 
properties.  

split  between 

Healthcare  expenditure  is  also  affected  by  the 
age  structure  of  the  population  and  the  way  total 
health-related  costs  are 
the 
government,  patients  or  private  insurance  bodies. 
However,  the  link  between  age  and  the  cost  of 
healthcare  is  much  less  linear  than  for  pensions. 
Although there is evidence that the consumption of 
healthcare  services  by  the  elderly  is  substantially 
larger than that by prime-age adults, an increase in 
life  expectancy  is  typically  also  accompanied  by 
an increase in the average number of healthy years 
and  so  healthcare  costs  need  not  increase  in  a 
linear  fashion.  The  reference  scenario  from  the 
Ageing Report which is used in the baseline results 
in this report assumes that half the increase in life 
expectancy is spent in good health. 

Long-term  care  expenditure  relates  to  the  costs 
associated  with  helping  people  carry  out  daily 
living  activities.  This  is  also  expected  to  increase 
with  an  ageing  population.  The  increase  depends, 
as with the healthcare expenditure, on the ‘quality’ 
of the ageing, but also crucially on the government 
support  available  for  individuals  less  able  to  look 
after  themselves.  There  is  large  variation  between 
Member  States  in  terms  of  their  reliance  on 
informal  care 
family 
members)  which  might  be  difficult  to  maintain 
going forward. 

(usually  provided  by 

Education  expenditure  as  a  share  of  GDP  tends 
to  fall  as  the  population  ages,  as  young  people 
make  up  a  smaller  share  of  the  population.    In 
order  to  estimate  the  size  of  this  change,  the 
Ageing Report considers the impact of the change 
in  the  number  of  children  and  young  people  on 
total  staff  compensation,  other  costs  (such  as 
educational  infrastructure)  and  the  cost  of  direct 
and 
their 
households. 

to  students  and 

transfers 

indirect 

Unemployment  benefits  and  other  benefits  for 
those  outside  the  labour  market  are  also  expected 
to  put  relatively  less  pressure  on  government 
balances,  as  the  higher  dependency  ratio  is  likely 
to result in lower levels of unemployment amongst 
labour market participants and greater incentives to 
participate  in  the  labour  market  for  working  age 
individuals. 

 
                                                           
The  social  protection  systems  in  place  determine 
how  a  change  in  the  population  translates  into 
costs  for  government  accounts.  The  projections 
used  for  the  analysis  are  presented  in  Chapter  II. 
Sensitivity  scenarios  in  Chapter  IV  show  the 
uncertainty 
these 
variables  and  the  implications  on  the  different 
measures of sustainability gaps. 

in  projections  for 

involved 

Neither  the  Ageing  Report  nor  this  report  make 
any  normative  judgement  about  the  efficiency  or 
desirability  of  Member  States'  social  protection 
systems  –  it  merely  assesses  their  expected  costs. 
Nor  are  the  second-order  effects  of  these  policies 
on  the  economy  taken  into  account.  For  example, 
inadequate  healthcare  may  reduce  the  labour 
market  participation  of  individuals  who  might 
otherwise be  able  and willing  to  work  to  an older 
age.  Higher  education  standards  may  require 
higher  expenditure  but  increase  the  efficiency  of 
labour force and potential output in the medium to 
long  term.  Inadequate  provision  of  formal  long-
term  care  may  adversely  effect  the  labour  market 
participation of women, which in turn would have 
a knock-on effect on economic growth.  

3.2.  A PARTIAL EQUILIBRIUM ANALYSIS 

The  sustainability  indicators  presented  in  this 
report  are  derived  on  the  basis  of  a  partial 
equilibrium analysis. A number of assumptions are 
therefore necessary for estimation to be possible. 

factor  productivity 

On  the  real  side  of  the  economy,  the  growth  path 
uses  the  demographic  profile  to  estimate  future 
labour input by making assumptions about the total 
population,  employment  rate,  the  share  of  the 
working  age  population  and  the  average  hours 
worked. This is combined with assumptions about 
total 
(TFP)  and  capital 
deepening  to  reach  a  forecast  of  potential  GDP, 
using  a  production  function  approach.  This 
depends  on  demographic  developments  (i.e.  on 
working age population) but is exogenous relative 
to  public  finance  and  therefore  fiscal  policy 
developments.  The  growth  projection  does  not, 
therefore,  consider  the  impact  that  unsustainable 
fiscal policies or the increase in tax burden to close 
sustainability gaps may have on economic activity. 
In the same manner, the real interest rates are set in 
an exogenous manner at 3% for all Member States, 

Sustainability of public finances 

Chapter I 

irrespective  of  the  government  debt  developments 
in the EU, the euro area and globally. 

3.3.  UNCHANGED POLICY ASSUMPTION 

The  projections  assume  that  social  protection 
arrangements  remain  unchanged  going  forward,  
and  that  nearly  all  government  revenues  and  non-
age related expenditure stays constant as a share of 
GDP.  This  no-policy  change  assumption  is  a 
purely technical assumption. It does not mean that 
such  a  scenario  is  realistic.  However  it  is  a 
necessary  assumption,  given  that  the  purpose  of 
the  exercise  is  to  identify  unsustainable  fiscal 
policies  and  to  measure  the  size  of  the  required 
remedial action. 

to 

Two  components  of  government  revenue  form  an 
exception 
the  constant  share  assumption.  
Projections for revenues from pension taxation and 
property  income  are  modelled  separately.  In  the 
former  case  it  is  because  revenues  from  pension 
taxation as themselves a consequence of ageing. It 
is  modelled  using  elasticities  of  personal  income 
tax revenues with respect to the tax base. This is a 
technical  improvement  as  compared  to  the  2006 
Sustainability  Report  where  such  modelling  was 
not undertaken.  

in 

by 

Moreover, 
the  2006  Sustainability  Report 
property  income  was  assumed  to  remain  constant 
as a share of GDP. In addition no accumulation of 
financial assets (or other components of the stock-
flows  adjustment  (SFA))  were  incorporated  in  the 
long-run so that the evolution of nominal debt was 
only 
government 
the 
driven 
two  assumptions  are, 
deficit/surplus.  These 
however, not mutually consistent. A constant ratio-
to-GDP of property income would have required a 
regular  accumulation  of  financial  assets,  with 
for  gross  debt  developments.  
implications 
Therefore the assumption of constancy of property 
income  as  ratio  to  GDP  in  the  Sustainability 
Report of 2006 was, therefore, abandoned.  

actual 

The  assumption  of  no  accumulation  of  financial 
assets and, therefore, no SFA assumption is kept in 
this  report.  It  implies  that  the  nominal  value  of 
remains 
government-owned 
constant and so there is a decrease of the share of 
those  assets  in  GDP.    Under  the  assumption  that 
nominal  returns  on  assets  are  constant  over  time, 

financial 

assets 

17 

 
European Commission 

Sustainability Report - 2009 

property  income  from  those  assets  also  decreases 
as  a  share  of  GDP.  This  is  clearly  the  case  for 
interest-bearing  assets  (bonds)  but  also  applies  to 
shares and other equity. (8) 

The  increases  in  age-related  expenditure  due  to 
demographic change are added to a constant level 
of  other  public  spending  as  a  share  of  GDP.  For 
the  years  beyond  2060  –  the  horizon  of  the 
available  demographic  projections  – 
further 
assumptions  are  also  necessary  in  relation  to  the 
infinite-horizon  budgetary  constraint  and  the  S2 
indicator.  Beyond  that  year  it  is  assumed  that 
government  revenue  and  primary  expenditure, 
including age-related expenditure, remain constant 
as a share of GDP, while interest payments evolve 
in line with debt developments. In so far as the EU 
this 
population  keeps  ageing  beyond  2060, 
assumption 
the 
sustainability  gap  (S2),  though  the  size  of  such  a 
projection error is minimised by the discounting of 
all future flows. 

underestimating 

implies 

(8)  Returns on assets that are currently owned by government 
are recorded as property income, and therefore included in 
government  revenue  reducing  the  general  government 
deficit.  This  is  why  the  change  in  the  primary  balances 
implied  by  the  property  income  projections  is  included  in 
the required adjustment given the initial budgetary position 
(IBP) term of the sustainability indicators. More details on 
property  income  projections  and  revenue  projections  from 
pension taxation are included in an appendix. 

18 

 
 
                                                           
Chapter II 
The economic and budgetary implications of 
ageing 

 
 
fiscal impact of ageing is therefore projected to be 
substantial  in  almost  all  Member  States;  these 
costs  will  accelerate  significantly  over  the  course 
of the next decade.  

An elderly population requires support in the form 
of  pensions,  healthcare  and  long-term  care.  Of 
these,  old-age  pension  provision  is  currently  the 
most significant budget item, although its share of 
GDP varies widely, ranging from 5% in Latvia to 
14% in Italy. By 2060, the Member States' public 
finances  would  face  spending  increases  of  2.3 
percentage points of GDP, on average, on the basis 
of  current  pension  structures.  The  size  of  the 
increase differs significantly across Member States 
and  pension  reforms  enacted  in  a  number  of 
countries  are  bringing  positive  results  in  terms  of 
expenditure  containment  and  sustainability  of 
public  finances.  Almost  all  Member  States  have 
tightened the eligibility requirements for receiving 
a public pension, mainly by raising the retirement 
age  and  restricting  access  to  early  retirement 
schemes.  

Once  projected  spending  on  healthcare  and  long-
term  care  has  been  added,  and  the  decreases  in 
unemployment  benefit  and  education  expenditure 
have been netted out, age-related expenditure over 
the EU is forecast to rise by 4½  percentage points 
of  GDP  by  2060,  from  a  base  of  23¼%  of  GDP 
(projected  for  2010).  However,  while  Poland  is 
expecting  a  reduction  in  age-related  expenditure, 
Greece  and  Luxembourg  are  forecast  to  have 
increases  of  over  15  percentage  points  of  GDP, 
with  all  other  countries  lying  between  these  two 
extremes. 

SUMMARY 

An  increase  in  life  expectancy,  alongside  a fall  in 
fertility rates is leading to an accelerated ageing of 
the  population  in  the  EU  and  other  parts  of  the 
world.  Over  the  years  to  2060,  the  time  period 
covered by this report, the EU population is set to 
age  further.  Aside  from  the  social  consequences, 
population  ageing  has 
significant  economic 
consequences  due  to  a  reduction  in  the  working 
age  population  and  an  increase  in  government 
expenditure related to ageing. 

increased 

Population ageing is not a new phenomenon in the 
life 
European  Union.  Already, 
expectancy and falling fertility rates have led to a 
change in the demographic structure. Over the next 
50 years, the phenomenon of an ageing population 
is  projected  to  intensify  with  life  expectancy 
increasing by 7 years for women and 8 ½ years for 
men, on average. Alongside this, fertility rates are 
projected  to  pick  up  somewhat  from  their  current 
level of 1.5 children per woman, to 1.6. They will 
therefore  remain  well  below  the  stable  population 
level  of  2.1, 
to  a  falling 
thus  contributing 
population.  A  continuation  of  net  migration  into 
the  European  Union  should  alleviate  some  of  the 
effects  of  increased  longevity  and  low  birth  rates, 
but  this  too  is  projected  to  slow,  albeit  with  great 
uncertainty underpinning the projections. 

These  changes  in  the  population  structure  have 
significant  economic  consequences,  stemming 
mainly  from  a  reduction  in  the  working  age 
population  and  an  increase  in  the  number  of 
elderly  people  requiring  support.  Overall,  the  old 
age  dependency  ratio  defined  as  the  population 
aged 65 or over as a percentage of the population 
aged 15 to 64, is projected to increase from 25% in 
2007  to  54%  in  2060.  In  parallel,  the  number  of 
individuals  aged  15  to  64  is  set  to  fall  from  332 
million in 2007 to 283 million by 2060. 

A decrease in the number of people of working age 
reduces  the  potential  economic  growth  rate  of  a 
country.  For  the  EU  –  before  considering  any 
durable impact on medium- to long-term growth of 
crisis  which  is  discussed  in  chapter  IV – potential 
growth  is  forecast  to  fall  from  2.4%  per  annum 
over 2007–20 to 1.3% over 2041–60. 

Aside  from  the  effect  on  economic  growth,  an 
ageing 
additional 
also 
government  expenditure 
terms  of  public 
provision of age-related transfers and services. The 

population 

entails 

in 

21 

 
 
 
 
 
1. 

THE EFFECT OF DEMOGRAPHIC CHANGES 

An  increase  in  life  expectancy,  alongside  a fall  in 
fertility rates is leading to an accelerated ageing of 
the  population  in  the  EU  and  other  parts  of  the 
world.  Over  the  years  to  2060,  the  time  period 
covered by this report, the EU population is set to 
age 
social 
consequences,  population  ageing  has  significant 
economic  consequences  due  to  a  reduction  in  the 
working  age  population  and  an 
in 
government expenditure. 

further.  Aside 

increase 

several 

from 

This  chapter  looks  at  population  projections  that 
underpin  this  report  and  considers  the  way  in 
which they are likely to affect the economies of the 
Member States of the European Union.  

underpinning  the  analysis  in  this  report  are  the 
Eurostat 
projections  EUROPOP 
2008. (9) 

population 

Life  expectancy  is  projected to  continue  changing 
over 
the  next  50  years  (see  Table  II.1.1), 
continuing the trend of increases in life expectancy 
in  all  Member  States  for  several  decades.  Life 
expectancy  at  birth  for  women  is  projected  to 
increase from 82.1 years in 2008 to 89.0 years by 
2060, while for men it is set to increase from 76.0 
years  to  84.5.  Overall,  it  is  in  countries  that 
currently  have  lower  life  expectancy  that  the 
the 
increase 
projections  assume  a  catching  up 
life 
expectancy. 

to  be  greatest  as 
in 

is  projected 

1.1. 

POPULATION AGEING 

Graph II.1.2: 

Fertility rates, 1960-2008, selected Member States 

Population  ageing  is  a  phenomenon  that  the 
Member  States  are  already  familiar  with,  but 
whose consequences are yet to be felt in full force. 
Already,  the  European  Union  has  experienced  an 
ageing of its population through an increase in life 
expectancy and a fall in fertility rates. This can be 
seen in graphs II.1.1 and II.1.2. 

Graph II.1.1:  Life expectancy at birth, 1960 to 2008, selected 
countries (males and females) 

85

80

75

70

65

60

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

BE
HU

BG
PT

CZ
SK

GR
FR

Source: Eurostat. 

Graph  II.1.1  shows  life  expectancy  at  birth  for 
eight  selected  EU  Member  States  from  1961  to 
2008.  Although 
is  variation  between 
countries  the  overall  trend  is  clear.  The  overall 
effect is set to intensify over the years to 2060, the 
figures 
this 
years  covered  by 

report.  The 

there 

4

3.5

3

2.5

2

1.5

1

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

BE
HU

BG
PT

CZ
SK

GR
FR

Source: Eurostat. 

Fertility  in  the  EU  has  declined  sharply  in  past 
decades.  The  total  fertility  rate,  defined  as  the 
average  number  of  births  per  woman,  has  fallen 
from a ‘baby boom’ level of 2.5 in the late 1960s 
to 1.5 in 2008, on average for the EU as a whole. 
Graph II.1.2 shows the evolution of fertility rate in 
eight  selected  EU  Member  States  over  the  years 
1961 to 2008; the decline over the years is evident 
to see.  

(9)  See  Giannakouris,  K.  (2008),  ‘Ageing  characterises  the 
demographic  perspectives  of  the  European  societies’, 
Eurostat Statistics in Focus, 78/2008.. 

22 

 
 
                                                           
The economic and budgetary implications of ageing 

Chapter II 

Table II.1.1: 

Demographic projections for the EU countries 

Fertility rate

Life expectancy at birth

(briths per woman)

Females

Males

Net annual migration flow (as 
% of population)

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU-27
EA

2008
1.8
1.4
1.3
1.9
1.3
1.6
1.9
1.4
1.4
2.0
1.4
1.5
1.4
1.4
1.7
1.4
1.4
1.7
1.4
1.3
1.4
1.3
1.3
1.3
1.8
1.9
1.9
1.5
1.5

2060
1.8
1.6
1.5
1.9
1.5
1.7
1.9
1.6
1.6
1.9
1.6
1.6
1.5
1.5
1.7
1.5
1.6
1.8
1.6
1.5
1.5
1.5
1.5
1.5
1.8
1.9
1.8
1.6
1.7

2008
82.3
76.7
80.2
81.0
82.6
78.7
81.9
82.6
83.9
84.3
84.2
81.7
76.7
77.4
81.2
78.1
81.1
82.2
82.9
79.9
82.4
76.6
81.9
78.7
83.1
83.1
81.5
82.1
82.3

2060
88.9
86.5
87.8
88.4
89.1
87.5
89.2
88.7
89.6
90.1
90.0
88.7
86.8
86.9
88.5
87.3
88.6
88.9
89.2
88.0
88.8
86.6
88.8
87.4
89.3
89.3
88.9
89.0
89.0

2008
76.7
69.7
73.9
76.4
77.3
68.0
77.5
77.4
77.4
77.5
78.5
78.2
66.0
65.9
76.3
69.7
76.0
77.9
77.4
71.4
75.8
69.8
74.7
70.9
76.1
79.0
77.4
76.0
76.6

2060
84.4
81.6
83.2
84.3
84.9
80.8
85.2
84.8
84.9
85.1
85.5
85.2
80.5
80.5
84.5
81.9
84.3
84.9
84.9
82.5
84.1
81.9
83.7
82.0
84.3
85.4
85.0
84.5
84.6

2008
0.5
0.0
0.2
0.2
0.2
0.0
1.4
0.4
1.4
0.2
0.4
1.2
0.0
-0.1
0.9
0.2
0.2
0.0
0.4
0.0
0.5
0.0
0.3
0.1
0.2
0.5
0.3
0.3

2060
0.2
0.0
0.2
0.1
0.2
0.0
0.1
0.2
0.3
0.1
0.3
0.4
0.0
0.0
0.4
0.2
0.2
0.1
0.2
0.0
0.3
0.0
0.1
0.1
0.1
0.1
0.1
0.2

Source: Eurostat, EUROPOP 2008. 

Graph II.1.3: 

Population pyramids (in thousands) for EU27 in 2008 and 2060 

Source:   Eurostat, EUROPOP 2008 

23 

 
 
 
European Commission 

Sustainability Report - 2009 

The  fertility  rates  for  all  the  countries  in  the 
European  Union  are  shown 
in  Table  II.1.1, 
including  the  Eurostat  projections  for  2060.  It 
shows  that  in  all  countries  in  the  EU,  the  fertility 
rate is currently below the population replacement 
rate  of  2.1  (the  fertility  rate  that  keeps  the 
population constant), but is set to increase in most 
countries,  to  reach  a  slightly  higher  average 
fertility rate of 1.6 by 2060. Despite the projected 
increase, fertility is projected to remain below the 
replacement rate for all countries.  

the 

The  third  factor  in  population  projections  is 
migration.  Over  time,  Europe  has  become  a 
destination for migrants, although there have been 
marked  differences 
trends  between 
in 
countries.  While  the  large  Western  European 
countries  were  the  traditional  destinations  for 
migrants, 
traditional 
emigration  countries  in  Southern  Europe  have 
become receiving countries, while many countries 
in Central and Eastern Europe are currently source 
and destination countries. 

recent  years 

some 

in 

Although  migration  flows  are  the  hardest  to 
predict,  as  they  depend  not  only  on  the  socio-
economic  situation  in  the  EU,  but  also  in  third 
countries,  projections  for  net  migration  are  also 
presented  in  Table  II.1.1  By  2060,  migration  into 
the  EU  is  set  to  fall  from  a  net  annual  inflow  of 
0.3%  of  the  EU  population  to  0.2%.  Overall, 
cumulative net migration is projected to add up to 
59 million people from 2008 to 2060, of which 46 
million  are  expected  to  arrive  in  the  16  countries 
that currently constitute the euro area. 

While  the  demographic  developments  differ  from 
country  to  country  the  overall  size  of  the  EU 
population is projected to remain the same in 2060 
as today, due to the slight rebound in fertility and 
relatively  dynamic  immigration  flows.  The  age 
distribution  of  the  population  is  forecast  to  differ 
markedly however. 

The  population  distribution  is  shown  in  the  age 
pyramids  in  Graph  II.1.3,  while  the  projected 
change  of  main  population  groups  are  shown  in 
more detail by Member State in Graph II.1.4. 

24 

 
The economic and budgetary implications of ageing 

Chapter II 

Graph II.1.4: 

Projected change of main population groups (in % change over the period 2008-2060) 

Children

Working age population

CY

LU

IE

UK

SE

BE

FR

ES

AT

DK

FI

EA

EU27

GR

PT

IT

NL

SI

EE

CZ

DE

MT

HU

LV

BG

LT

PL

RO

SK

CY

IE

SK

LU

MT

ES

PL

CZ

UK

PT

NL

RO

AT

SI

FR

SE

BE

EU27

DK

EA

FI

HU

GR

LT

IT

EE

LV

BG

DE

CY

LU

IE

UK

SE

FR

BE

DK

AT

ES

PT

EA

NL

FI

EU27

IT

GR

MT

DE

CZ

HU

EE

SI

SK

RO

PL

LT

LV

BG

-45

-25

-5

15

35

-45

-25

-5

15

35

Elderly

Very old

IE

CY

SK

LU

RO

MT

CZ

ES

PL

SI

GR

PT

HU

NL

EU25

LT

EA

IT

AT

DK

BG

FI

BE

EE

FR

UK

LV

DE

SE

0

50

100

150

200

250

0

50

100

150

200

250

300

350

400

Source:   Eurostat, EUROPOP 2008. 

25 

 
 
European Commission 

Sustainability Report - 2009 

1.2. 

LABOUR FORCE PROJECTIONS 

The  economic  consequences  of  the  expected 
change in population structure stem mainly from a 
reduction  in  the  working  age  population  and  an 
increase in the number of elderly people requiring 
support.  Overall,  the  old-age  dependency  ratio, 
defined  as  the  population  aged  65  or  over  as  a 
percentage  of  the  population  aged  15  to  64,  is 
projected to increase from 25% in 2007 to 54% in 
2060.  In  parallel,  the  number  of  individuals  aged 
15 to 64 is set to fall from 331.9 million in 2007 to 
283.3 million by 2060. 

Graph  II.1.5  shows  the  projected  trajectory  of  the 
working  age  population  and  total  employment  for 
2007  to  2060.  The  figures  come  from  the  2009 
Ageing  Report,  which  calculates  the  economic 
consequences of an ageing population for the years 
until 2060. The data provided in that report forms 
the  basis  for  analysis  the  impact  of  ageing  on  the 
public finances in this report. 

labour  market  participation  rate 

The  graph  shows  that  the  working  age  population 
is  forecast  to  increase  until  2013  and  then  start  to 
fall.  The 
is 
projected  to  increase  from  70½%  in  2007  to  74% 
in 2060 for the EU as a whole, most of which will 
materialise  before  2020.  The  gap  between  male 
and  female  participation  rates  is  expected  to 
narrow  gradually,  especially  in  countries  where  it 
is  currently  large.  Overall,  employment  rates  are 
expected to increase from 65½% in 2007 to about 
70%  in  2060.  Within  this  total,  the  employment 
rate  of  older  workers 
to  grow 
substantially  as  a  result  of  reforms  aimed  at 
prolonging  working  life  in  many  Member  States, 
in  health 
and 
conditions of those above 65. These reforms have 
been  enacted  to  counter  some  of  the  increase  in 
costs  that  will  materialise  as  the  population  ages. 
Overall,  however,  employment  in  the  EU  is 
projected to shrink by about 19 million people by 
the year 2060. Increasing labour force participation 
rates in most countries and higher net immigration 
levels  in  some  will  only  moderate  the  fall  in 
employment  due  to  the  shrinking  working  age 
population over the period from 2020 to 2060. 

the  projected 

improvement 

is  expected 

1.3. 

LABOUR PRODUCTIVITY AND POTENTIAL 
GROWTH 

Economic growth is determined by the increase in 
the  number  of  people  in  production  and  the 
increase  in  their  productivity.  A  slow  down  or 
decrease in employment will therefore act to lower 
economic growth unless productivity accelerates.  

Graph  II.1.6  shows  the  forecast  for  potential 
economic  growth  in  the  EU  from  2007  to  2060, 
broken  down  into  three  time  periods.   (10).  In  the 
baseline scenario, the forecast is for potential GDP 
growth to average 2.4% for the years 2007–20, of 
which  0.6%  is  due  to  the  forecast  increase  in 
employment.  Thereafter, 
the 
working  age  population  and  employment  acts  to 
reduce  GDP  growth  and  the  only  source  of 
economic 
productivity 
improvements.  Of  course,  in  the  light  of  the 
financial  crisis,  the  outlook  for  at  least  the  short 
term  is  now  likely  to  be  considerably  lower  than 
the baseline.  

growth  will 

the  decrease 

be 

in 

As  a  result  of declining  labour  input, productivity 
will  eventually  be  the  only  source  of  future 
economic  growth.  The  assumption  used  in  the 
potential  GDP  forecasts  is  that  Member  States' 
labour  productivity  growth  would  converge  to  a 
long-term historical average in the EU of 1¾% per 
annum,  close  to  that  recorded  in  the  US  and  the 
EU over the very long term. As a result, the annual 
rate  would  decline 
potential  GDP  growth 
significantly on account of the shrinking working-
age population, which will act as a drag on growth 
and on per capita income. By the 2041–60 period, 
GDP  growth  is  forecast  to  average  1.3%  per 
annum. 

(10)  The figures do not take account any durable impact of the 
financial crisis on medium- to long-term potential growth, 
which is discussed in detail in Chapter IV. 

26 

 
 
                                                           
The economic and budgetary implications of ageing 

Chapter II 

Graph II.1.5: 

Population of working-age and total employment, EU27 

w orking-age population

total employment

employment rate

2013-2019:
rising  
employment,  
declining 
working-age 

population

until 2012:
rising  
employ
ment
and slow 
growth in 
working-
age 
population

340

320

300

280

260

240

220

200

180

from 2020 onward:

both  employment  and working-age population decline

7
0
0
2

0
1
0
2

3
1
0
2

6
1
0
2

9
1
0
2

2
2
0
2

5
2
0
2

8
2
0
2

1
3
0
2

4
3
0
2

7
3
0
2

0
4
0
2

3
4
0
2

6
4
0
2

9
4
0
2

2
5
0
2

5
5
0
2

8
5
0
2

Source:  Commission services, EPC. 

Graph II.1.6:  Decomposition of GDP growth, EU27, ( annual average growth rate) 

EU27

71

70

69

68

67

66

65

64

63

5.0

4.0

3.0

2.0

1.0

0.0

d
n
a

t

h
w
o
r
g

y
t
i

v
i
t
c
u
d
o
r
p
r
u
o
b
a
L

t

h
w
o
r
g
r
u
o
b
a
L

-1.0

2007-20

2021-40

2041-60

Labour productivity growth
GDP growth
S i 14

Labour growth
GDP per capita growth
S i 15

Source:  Commission services, EPC. 

5.0

4.0

3.0

2.0

1.0

0.0

-1.0

t

h
w
o
r
g
P
D
G

27 

 
 
 
 
 
 
 
 
European Commission 

Sustainability Report - 2009 

Graph II.1.6 also shows GDP growth per capita. It 
shows  that  over  the  three  time  periods  displayed, 
this  goes  from  being  lower  than  overall  growth 
until  2020,  to  being  higher  after  2040.  This  is 
because  the  overall  population  falls  and  results  in 
living  standards  growing  by  more 
the 
headline GDP growth figures indicate.   

than 

1.4. 

BUDGETARY PROJECTIONS 

entails 

population 

Aside  from  the  effect  on  economic  growth,  an 
additional 
also 
ageing 
government  expenditure 
terms  of  public 
provision of age-related transfers and services. The 
fiscal impact of ageing is therefore projected to be 
substantial  in  almost  all  Member  States;  these 
costs  will  accelerate  significantly  over  the  course 
of the next decade.  

in 

tightened 

In the absence of changes to policy, public pension 
expenditure is projected to increase significantly in 
most  Member  States  due  to  the  demographic 
trends  with  more  people  retiring  and  spending 
more  years  in  retirement  thanks  to  the  increase  in 
longevity. However, pension  reforms  enacted  in  a 
number  of  Member  States  are  bringing  positive 
results  in  terms  of  expenditure  containment  and 
sustainability  of  public  finances.  Almost  all 
Member  States  have 
the  eligibility 
requirements  for  receiving  a  public  pension, 
mainly by raising the retirement age and restricting 
access  to  early  retirement  schemes.  Reforms  are 
also leading to a gradually smaller share of public 
pension  benefits  in  overall  pension  provision. 
Alongside  reforming  public  pensions  systems, 
many  countries  have 
introduced,  and/or  are 
planning to expand, supplementary funded pension 
schemes. Overall, public pension spending is set to 
increase  by  2.3  percentage  points  GDP  by  2060, 
from  a  base  of  10.2%  of  GDP.  This  is  shown  in 
Table  II.1.2  along  with  the  change  to  other  age-
related expenditure items and their projected levels 
from 2010 on. 

As  Table  II.1.2  shows,  public  expenditure  on 
health care is projected to grow by 1.4 percentage 
points  of  GDP  in  the  EU  by  2060  from  a  base  of 
just  under  7%  of  GDP.  The  increase  in  living 
standard  conditions  is  an  important  driver  of 
healthcare  costs,  affecting 
for 
healthcare  mainly  through  higher  expectations  on 

the  demand 

28 

quantity  and  quality  of  care  to  be  provided  or 
financed by government.  

Analysis  of  past  trends  in  healthcare  expenditure 
suggests  that  technological  developments  –  new 
and  better  treatments (11)  –  are  responsible  for  a 
significant part of overall costs growth, which may 
result in a significant increase in spending which is 
not  fully  captured  in  the  projection. (12)  However, 
technological advancement may also have positive 
effects  on  reducing  costs  of  medical  treatments 
through  efficiency  gains 
(faster  and  better 
treatments). There is large uncertainty as to which 
factor will dominate in the future.  

Based  on  current  policies,  public  spending  on 
long-term  care  is  projected  to  increase  by  1.1  
percentage points of GDP by 2060 due to the fact 
that  the  very  old  (aged  80+)  will  be  the  fastest 
growing  age  class  of  the  population  in  the  future. 
But  there  are  upside  risks  to  these  costs  due  to 
changes  in  family  structures,  higher  labour  force 
participation of women and increased geographical 
mobility.  

results  solely 

Public  expenditure  on  education  is  also  in  part 
determined  by  demographics.  The  baseline 
scenario  suggests  a  small  decrease  in  the  public 
education  expenditure  ratio  over  the  projection 
period 
the 
demographic  composition  (fewer  children  in  the 
future). However, aside from demographic factors, 
other factors also affect education spending and it 
may  be  that  ambitions  to  increase  attainment 
dominate the savings that demographics can offer. 

from  changes 

in 

(11)  Of course, these new and better treatments are also one of 
the  reasons  explaining  the  increases  in  longevity  over  the 
last decades and projected for the future. 

(12)  Sensitivity  tests  in  the  2009  Ageing  Report  suggest  that 
increases  in  health  care  expenditure  as  a  share  of  GDP 
could be as much as four times higher than in the baseline 
scenario which is presented above over 2010–60. 

 
                                                           
The economic and budgetary implications of ageing 

Chapter II 

Table II.1.2: 

Increase in age-related expenditure, 2010-2060, % of GDP 

Pension spending

Healthcare

Long-term care

Unemployment benefits 
and education

Total

Change 
2010 to 
2060
4.5
2.2
4.0
-0.2
2.5
-1.6
5.9
12.5
6.2
0.6
-0.4
10.8
0.0
4.9
15.3
2.6
5.1
4.0
1.0
-2.1
1.5
7.4
8.5
3.6
2.6
-0.2
2.5
2.3
2.7

2010
7.7
4.8
6.4
6.0
7.6
5.1
5.9
5.1
5.6
8.2
5.9
2.8
3.5
4.6
5.9
5.8
4.9
4.9
6.6
4.1
7.3
3.6
6.8
5.2
5.6
7.3
7.6
6.8
6.8

Change 
2010 to 
2060
1.1
0.6
2.0
0.9
1.6
1.1
1.7
1.3
1.6
1.1
1.0
0.6
0.5
1.0
1.1
1.3
3.1
0.9
1.4
0.8
1.8
1.3
1.7
2.1
0.8
0.7
1.8
1.4
1.3

2010
1.5
0.2
0.2
1.8
1.0
0.1
0.9
1.5
0.7
1.5
1.7
0.0
0.4
0.5
1.4
0.3
1.0
3.5
1.3
0.4
0.1
0.0
1.2
0.2
1.9
3.5
0.8
1.3
1.4

Change 
2010 to 
2060
1.3
0.2
0.4
1.5
1.4
0.1
1.3
2.1
0.7
0.7
1.2
0.0
0.5
0.6
2.0
0.4
1.6
4.6
1.2
0.7
0.1
0.0
1.7
0.4
2.5
2.2
0.5
1.1
1.3

2010
7.3
3.0
3.3
8.0
4.6
3.2
5.3
3.8
4.8
5.8
4.3
5.8
3.3
3.5
4.0
4.5
5.0
5.6
5.2
3.8
5.6
2.7
5.1
2.9
6.4
6.6
4.0
4.9
5.0

Change 
2010 to 
2060
-0.3
0.2
0.0
0.1
-0.4
0.3
-0.2
0.1
-0.2
-0.2
-0.2
-0.6
0.3
-0.4
-0.3
-0.3
-0.7
-0.2
-0.2
-0.6
-0.4
-0.2
0.7
-0.6
0.0
0.0
0.0
-0.2
-0.2

2010
26.8
17.1
17.0
25.2
23.3
14.8
17.5
21.9
20.0
29.0
26.0
15.5
12.3
15.1
19.9
21.8
19.2
20.5
25.7
19.1
24.9
14.7
23.1
14.9
24.7
27.1
19.2
23.2
24.5

Change 
2010 to 
2060
6.6
3.2
6.3
2.2
5.1
-0.1
8.7
16.0
8.3
2.2
1.6
10.7
1.3
6.0
18.2
4.0
9.2
9.4
3.3
-1.1
2.9
8.5
12.7
5.5
5.9
2.7
4.8
4.6
5.1

2010
10.3
9.1
7.1
9.4
10.2
6.4
5.5
11.6
8.9
13.5
14.0
6.9
5.1
6.5
8.6
11.3
8.3
6.5
12.7
10.8
11.9
8.4
10.1
6.6
10.7
9.6
6.7
10.2
11.2

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU-27
EA

Source:  Commission services, EPC. 

The  projections  on  unemployment  benefit 
expenditure  are  based  solely  on  the  evolution  of 
the  unemployment  rates,  which  stem  from  the 
macroeconomic and labour market assumptions. In 
the  EU,  expenditure  on  unemployment  benefits  is 
projected  to  fall  from  0.8%  of  GDP  in  2007  to 
0.6%  of  GDP  in  2060,  though  large  fluctuations 
may  be  expected  over  such  a  long  period.  This 
reduction  is  mainly  driven  by  the  assumption  that 
unemployment 
in  all  countries  with 
unemployment  rates  above  the  EU15  average 
would  converge  to  the  EU15  average  by  2020. 
Indeed,  after  2020,  only  small  changes  are 
projected.    

rates 

Overall,  on  the  basis  of  current  policies,  age-
related  public  expenditure  is  projected  to  increase 
on  average  by  4.3  percentage  points  of  GDP  by 
2060  in  the  EU  –  especially  through  pension, 
healthcare and long-term care spending. There are 
however  marked  differences  in  the  impact  of 
ageing across Member States: 

in 

nine  EU  Member 

more) 
States 
(Luxembourg,  Greece,  Slovenia,  Cyprus, 
Malta,  the  Netherlands,  Romania,  Spain,  and 
Ireland), although for some countries the large 
increase will be from a fairly low level. 

•  For  a  second  group  of  countries  –  Belgium, 
Finland,  Czech  Republic,  Lithuania,  Slovakia, 
the United Kingdom, Germany and Hungary – 
the cost of ageing is more limited, but still very 
high  (between  4  and  7  percentage  points  of 
GDP). 

•  Finally,  the  increase  is  more  moderate,  4 
percentage points  of  GDP or  less,  in  Bulgaria, 
Sweden,  Portugal,  Austria,  France,  Denmark, 
Italy, Latvia, Estonia and Poland. Most of these 
countries 
substantial 
pension reforms, in several cases also involving 
a  partial  switch  to  private  funded  pension 
schemes  (Bulgaria,  Estonia,  Latvia,  Poland, 
and Sweden). 

implemented 

have 

•  The 

increase 

in  government  spending 

in 
ageing-related  categories  is  likely  to  be  very 
significant  (7  percentage  points  of  GDP  or 

  The projected increase for the EU as a whole is 
long-term 
than 
2006 
considered 

slightly  higher 
projections, 

the 

the 

in 

in 

29 

 
 
 
European Commission 

Sustainability Report - 2009 

Sustainability  Report, 
the 
extension  of  the  projection  horizon  from  2050 
to 2060. 

in  part  due 

to 

  At  Member  State 

level, 

large  downward 
revisions  in  the  budgetary  impact  of  ageing 
have  occurred  since  the  2006  Sustainability 
Report in Portugal, Hungary, Denmark and the 
Czech  Republic  (reflecting 
impact  of 
pension  reforms).  By  contrast,  large  upward 
revisions are reported in Greece, Luxembourg, 
Malta,  Estonia,  Austria,  Poland  and  Lithuania 
(reflecting  primarily  revised  projected  changes 
in  pension  expenditure  stemming  from  reform 
reversals 
modelling 
techniques) (13). 

improved 

and 

the 

(13)  In the case of Greece, the large upward revisions are due to 
the data not being available in time for the previous report. 
Note also that the cases of Bulgaria and Romania were not 
considered in the 2006 report. 

30 

 
 
                                                           
Chapter III 
Quantitative sustainability results 

 
 
Member States will need to find some combination 
of  structural  reforms  of  their  social  protection 
system  that  result  in  a  reduction  in  the  cost  of 
ageing,  an  increase  in  tax  or  a  reduction  in 
spending. Aside from choosing the optimal way of 
addressing  the  anticipated  hole  in  their  public 
finances,  the  timing  of  policy  action  is  also 
important,  all  the  more  as  fiscal  policy  is  playing 
an important role in pulling the economy out of the 
crisis.  On  average,  delaying  the  response  by  5 
years increases the gap by 0.5 points of GDP, but 
this  cost  of  delay  is  much  more  severe  for  a 
represents 
number  of  Member  States.  This 
additional  measures  that  must  be  introduced  and 
permanently maintained.  

SUMMARY 

This  chapter  presents  the  baseline  results  of  the 
sustainability  analysis.  The  S2  indicator  shows  a 
sustainability  gap  of  6.5%  of  GDP  for  the 
European Union overall, while the S1 shows a gap 
of  5.8%.  However  there  is  considerable  variation 
between  Member  States.  While  nearly  all  EU 
countries  display  sustainability  gaps  on  both 
indicators,  Denmark  and  Hungary  display  no 
sustainability  gaps,  and  Bulgaria  only  displays  a 
sustainability  gap  on  the  S2,  but  not  on  the  S1 
measure. 

According  to  the  S2  indicator,  of  the  25  Member 
States that display a gap, around a fifth require an 
adjustment  of  below  4%  of  GDP,  a  further  half 
below  8%  and  a  third  between  this  and  15%  of 
GDP. 

Most countries have sustainability gaps as a result 
of  both  an  unfavourable  starting  position  for  the 
public finances and due to the projected increase in 
the  cost  of  ageing.  However,  a  fifth  of  countries 
have an underlying fiscal position which would be 
sustainable over the long term, were it not for the 
projected  increase  in  age-related  expenditure.  On 
average,  ½  of  the  gap  is  due  to  the  initial  fiscal 
position  and  another  ½  due  to  the  projected 
increase in age-related expenditure.  

The  sustainability  gap  indicators  show  the  size  of 
the  permanent  adjustment  that  is  required  to  keep 
the  public  finances  sustainable.  Not  making  this 
adjustment  would  have  the  short  to  medium-term 
effect  of 
serious 
sustainability  concerns  start  affecting  countries' 
abilities  to  raise  debt  as  the  perceived  long-term 
risks increase. In the absence of an adjustment, by 
2060 the EU government debt-to-GDP ratio could 
be more than seven times larger than it is now. 

increasing  debt,  before 

In  2006  the  first  Commission’s  Sustainability 
Report  was  published.  The  S2  sustainability  gap 
was  3.4%  of  GDP  for  the  25  Member  States 
considered  in  that  report,  some  3.1  points  lower 
than  in  the  current  report.  Aside  from  some 
methodological  changes,  and  fresher  long-term 
projections, 
the 
government deficits and debt levels explains most 
of the worsened sustainability gaps. 

recent  deterioration 

the 

in 

It is clear that Member States will need to address 
the  challenges  posed  by  the  sustainability  gaps. 
Depending on the size and the cause of their gaps, 

33 

 
1. 

THE SUSTAINABILITY RESULTS 

For the S1 gap, the DR adds a required adjustment 
of 0.2 p.p. for the EU-27 and 0.3 p.p. for the Euro 
Area.  

The table also shows the absolute increase in age-
related  expenditure  until  2060.  Overall,  for  the 
EU-27,  age  related  expenditure  is  expected  to  be 
4.4  percentage  points  of  GDP  higher  in  2060 
relative  to  2010  and  4.8  percentage  points  higher 
for the Euro Area. This is higher than the impact of 
the LTC due to the discounting of future flows and 
time-profile  of  the  age-related  expenditure,  in 
particular  the  fact  that  moderate  increases  in 
expenditure  are  expected  in  the  early  years  of  the 
projection.  The  difference  between  the  projected 
increase  in  age-related  expenditure  and  the  LTC 
component of the sustainability gaps is also related 
to  the  relationship  between  the  long-term  real 
growth  rates  and  the  assumption  on  real  interest 
rates.  

nearly 

countries 

all  EU 

the  aggregates 

Within 
there  are  significant 
differences across Member States both in terms of 
the  indicators  and  their  constituent  components. 
While 
display 
sustainability  gaps  on  both  indicators,  Denmark 
and  Hungary  display  no  sustainability  gaps,  and 
Bulgaria  only  displays  a  sustainability  gap  on  the 
S2, but not the S1 measure. In Bulgaria's case this 
is  because  its  low  debt  allows  some  leeway  in 
dealing  with  the  costs  of  ageing  through  an 
increase in this debt and because the cost of ageing 
is higher in the  more distant future, thus having a 
larger impact on S2 than on S1. 

This  Section  presents 
the 
sustainability  analysis  in  terms  of  the  S1  and  S2 
indicators  and  their  respective  components,  as 
described in Chapter I.  

results  of 

the 

1.1. 

THE QUANTITATIVE INDICATORS 

Table  III.1.1  shows  estimates  of  the  sustainability 
gap  indicators  S1  and  S2  and  decomposes  them 
into  their  constituent  parts.  These  are: (i) the 
required  adjustment  given  the  initial  budgetary 
position  (IBP),  which  gives  the  gap  between  the 
structural  primary  balance  in  2009  and  the  long-
term  debt-stabilising  budget  balance; 
(ii) the 
required adjustment given the long-term change in 
the  budgetary  position  due  to  the  costs  of  ageing 
(LTC), and (iii), the adjustment necessary to reach 
the  debt  target  of  60%  of  GDP  in  2060.  The 
overall change to the share of GDP to be spent on 
age-related expenditure in 2060 relative to 2010 is 
also shown, as is the structural primary balance for 
2008 and 2009. 

The  S2  indicator  shows  a  sustainability  gap  of 
6.5% of GDP for EU-27 and of 5.8% of GDP for 
the Euro Area. This is the permanent adjustment in 
the  primary  balance  necessary 
the 
intertemporal  budget  constraint  over  an  infinite 
horizon.  The  S1  indicator  shows  a  sustainability 
gap for the EU-27 countries and for the Euro Area, 
of 5.4% and 4.8% of GDP respectively.  

to  meet 

The decomposition results show that for the EU-27 
countries, the IBP is responsible for 3.3 percentage 
points (p.p.) of the S2 gap and 3.1 p.p. for the S1 
gap.  This  means  that  even  without  taking  into 
account the cost of ageing – that is, assuming that 
age-related  expenditure  in  government  accounts 
remained  constant  as  a  share  of  GDP  –  European 
countries would have to tighten their fiscal stances, 
in  terms  of  the  structural  primary  balance,  by  an 
average  of  3.3%  of  GDP  for  their  public  finances 
to return to a sustainable path. 

LTC contributes 3.2 p.p. to the S2 gap and 2.0 p.p. 
to  the  S1  gap,  with  the  figures  being  3.5  p.p.  and 
2.4 p.p. respectively for the Euro Area. This shows 
that  the  projected  increase  in  ageing-related  costs 
has  a  significant  impact  on  the  sustainability 
position of each. 

34 

 
Quantitative sustainability results 

Chapter III 

Table III.1.1:  Results of the sustainability gap calculations in the baseline scenario (% of  GDP) 

Structural 
primary balance 
2008
1.5
1.0
-2.3
5.6
1.6
-3.9
-6.4
-2.1
-2.4
-1.5
1.7
2.9
-4.9
-4.5
2.3
-0.3
-1.6
1.7
0.8
-3.1
-0.9
-7.2
-1.3
-3.5
4.3
3.4
-3.3
-0.4
0.2

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

Structural 
primary balance 
2009
0.7
1.1
-2.9
2.8
0.6
-0.6
-7.6
-0.9
-5.2
-2.7
2.0
0.2
-8.1
-3.1
1.2
3.1
-0.2
0.0
-0.2
-3.1
-2.4
-3.7
-3.3
-3.7
2.1
0.9
-7.8
-2.0
-0.9

Change
in age-related 
expenditure
5.9
3.2
6.3
1.0
5.1
-0.1
8.7
16.0
8.0
2.1
1.6
10.7
1.3
6.0
16.2
3.3
9.2
6.7
4.0
-1.2
2.8
8.5
12.5
5.5
5.4
2.4
4.8
4.4
4.8

Total
4.5
-0.6
5.3
-0.6
3.1
0.3
12.1
10.8
9.5
5.5
1.9
4.6
9.4
5.4
6.2
-1.1
4.7
5.2
3.8
2.9
4.7
6.9
9.2
5.7
2.6
0.5
10.8
5.4
4.8

S1

DR*
0.6
-0.5
-0.3
-0.5
0.2
-0.6
0.2
0.7
-0.1
0.4
0.7
-0.3
-0.2
-0.3
-0.8
0.4
0.2
0.0
0.2
0.0
0.3
-0.4
-0.3
-0.3
-0.3
-0.3
0.2
0.2
0.3

IBP*
0.5
-0.7
3.6
-1.9
0.8
1.0
8.2
2.4
5.9
3.8
-0.2
0.2
8.8
3.7
-0.6
-1.9
1.1
1.6
1.5
4.2
3.4
4.1
3.8
4.3
-0.8
-0.1
8.6
3.1
2.1

LTC*
3.5
0.6
1.9
1.8
2.1
-0.2
3.7
7.7
3.6
1.4
1.4
4.7
0.9
2.0
7.5
0.4
3.4
3.7
2.2
-1.2
1.0
3.2
5.7
1.6
3.7
0.8
2.0
2.0
2.4

Total
5.3
0.9
7.4
-0.2
4.2
1.0
15.0
14.1
11.8
5.6
1.4
8.8
9.9
7.1
12.5
-0.1
7.0
6.9
4.7
3.2
5.5
9.1
12.2
7.4
4.0
1.8
12.4
6.5
5.8

S2
IBP*
0.6
-0.6
3.7
-1.6
0.9
1.1
8.3
2.6
6.1
3.8
-0.1
0.5
8.9
3.9
-0.4
-1.6
1.4
1.9
1.6
4.4
3.7
4.3
3.9
4.5
-0.5
0.2
8.8
3.3
2.3

LTC*
4.8
1.5
3.7
1.4
3.3
-0.1
6.7
11.5
5.7
1.8
1.5
8.3
1.0
3.2
12.9
1.5
5.7
5.0
3.1
-1.2
1.9
4.9
8.3
2.9
4.5
1.6
3.6
3.2
3.5

* IBP = required adjustment given the  initial budgetary position, DR =  adjustment to reach the debt requirement (60% of GDP) in 2060, LTC = 
required adjustment given the long-term change in the primary balance due demographic ageing. 
Source: Commission services 

According  to  the  S2  indicator,  of  the  25  Member 
States  that  display  a  sustainability  gap,  around  a 
fifth require an adjustment of below 4% of GDP, a 
further half below 8% and a third between this and 
15%  of  GDP.  In  terms  of  the  S1  indicator,  of  the 
24 Member States with a sustainability gap, around 
a quarter require an adjustment of  below 3½% of 
GDP,  a  further  half  between  3½  and  6½%  and  a 
quarter between this and 12½% of GDP. Broadly, 
the  countries  displaying  significant  sustainability 
gaps  on  one  measure,  also  display  it  on  the  other 
and, in all cases except Italy, (14) the sustainability 
gap  is  greater  according  to  the  S2  than  the  S1 
indicator. 

(14)  Due to a series of reforms since 1992 to its pension system, 
Italy is facing a relatively low increase in the cost of ageing 
with  little  difference  between  the  LTC  contribution  to  S1 
and S2, but faces a high S1 due to its high debt ratio. The 
long-term  projections  for  Italy  assume,  however,  that  all 
legislated  changes  in  the  pension  system  will  be  duly 
implemented as planned.  

1.2.  A GRAPHIC REPRESENTATION OF THE 

SUSTAINABILITY GAP (S2) 

Table  III.1.1  shows  the  decomposition  of  the  S1 
and S2 indicators into their constituent components 
(IBP,  DR  and  LTC).  Using  the  data  for  the  S2 
indicator, Graph III.1.1 depicts the contribution of 
the IBP and the LTC components. 

in 

costs 

age-related 

The further along the horizontal axis countries are, 
the  larger  the  required  adjustment  to  stabilise  the 
debt  ratios  given  the  initial  budgetary  position 
(IBP),  before  considering  the  long-term  costs  of 
ageing. The higher up the vertical axis, the greater 
the  required  adjustment  due  to  the  long-term 
(LTC).  The 
change 
sustainability  gap  (S2)  is  the  sum  of  the  vertical 
and horizontal distances from each dot to the solid 
diagonal  line.  Countries  that  are  northeast  of  the 
solid  diagonal  line  have  a  sustainability  gap;  the 
further  away  from  that  line,  the  greater  their  gap. 
Countries that lie southwest of the solid line (in the 
chart  Denmark 
and  Hungary  only)  have 
sustainable  public  finances,  the  ageing  population 
notwithstanding. The dotted diagonals are ‘isogap’ 
lines: two countries located on the same line have 
the  same  sustainability  gap  (S2)  over  an  infinite 

35 

 
                                                           
 
 
European Commission 

Sustainability Report - 2009 

Graph III.1.1:  Decomposition of the S2 indicator 

LTC (% of GDP)

S2=0

S2=2

S2=4

S2=6

S2=8

S2=10

S2=14

LU

S2=16
EL

Sustainability gap
(S2>0)

No sustainability gap
(S2<0)

Unfavourable long-term projections

Favourable long-term projections

CY

SI

MT

NL

IE

ES

BE

FI

DE

AT

IT

SE

HU

BG

DK

EA EU
FR

EE

RO

CZ
LT

SK

PT

PL

UK

LV

Favorable initial fiscal position

Unfavorable initial fiscal position

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

-2.0

-4.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Source: Commission services. 

8.0

10.0

IBP (% of GDP)

horizon,  though  they  may  have  different  initial 
budgetary  positions  and  different  ageing-related 
costs. 

1.3. 

THE LONG TERM BUDGETARY COST OF 
AGEING 

Most Member States are in the top right quadrant, 
showing  that  their  sustainability  gap  is  due  to  the 
compounding  effects  of  an  unfavourable  initial 
fiscal  position  and  an  increase  in  the  budgetary 
cost  of  ageing.  Countries  in  the  top  left  quadrant 
have  a  favourable  initial  budgetary  position  in 
the  consolidation  efforts  of 
2009 
previous  years.  However  for  most  of  them  this 
initial  position  is  not  enough  given  the  expected 
long-term increase in expenditure. 

thanks 

to 

the  recent  consolidation  efforts 

Only  Denmark  and  Hungary  have  an  initial  fiscal 
position  that  is  favourable  enough  to  absorb  the 
expected  increase  in  costs  related  to  ageing. 
in 
However, 
Hungary must be pursued in coming years in order 
to  reduce  its  government  debt  ratio.  Finally, 
Estonia  and  Poland  are  in  the  bottom  right 
quadrant; that means that they have a sustainability 
gap  which  is  caused  by  an  unfavourable  initial 
fiscal position, but which is reduced by a projected 
decrease in age-related spending. 

36 

The LTC component shows significant differences 
between Member States in terms of the budgetary 
impact  of  ageing  until  2060  and  indefinitely.  As 
worked  out  for  the  infinite  horizon,  its  impact 
ranges  from  a  margin  of  1.2%  of  GDP  in  Poland 
because of the long-term reduction in expenditure, 
to a required adjustment of 12.9% in Luxembourg 
because of the increase in ageing-related spending.  

Overall, the LTC components of the sustainability 
gap lies under 2% of GDP for ten Member States 
(Poland, Estonia, Latvia, Denmark, Italy, Bulgaria, 
Hungary,  Sweden,  France  and  Portugal).  Nine 
Member States face a budgetary impact of between 
2% and 5% of GDP (Slovakia, Austria, Lithuania, 
Germany, 
the  Czech 
the  United  Kingdom, 
Republic,  Finland,  Belgium  and  Romania).  The 
remaining  eight  countries  (the  Netherlands Malta, 
Spain,  Ireland,  Cyprus,  Slovenia,  Greece  and 
Luxembourg) have a LTC of 5% of GDP or above, 
with 
incumbent  on  Greece  and 
Luxembourg representing 11.5 and 12.9% of GDP, 
respectively.  

the  costs 

Chapter II decomposed the contribution of pension 
spending,  healthcare,  long-term  care,  education 

 
in  spending.  Overall,  however, 

and  unemployment  benefits  on  the  projected 
increase 
the 
Member  States  facing  high  expected  costs  do  so 
primarily  on  the  basis  of  the  high  costs  of  their 
pension  systems  –  with  the  exception  of  the 
Netherlands,  where 
in 
pension  spending  contribute  4  p.p.  points  of  GDP 
to the increase in spending, while long term care is 
expected  to  increase  by  5.8  p.p.  of  GDP.  The 
countries  with  the  largest  projected  increases  in 
pension-related  expenditure  are  those  have  so  far 
introduced at best modest reforms to their pension 
systems.  

the  projected  change 

the 

leads 

time  profile 

In  all  Member  States  (except  Denmark),  the  LTC 
has a larger impact on the S2 than the S1 indicator. 
As  this  is  due  to  the  time  profile  of  the  costs  of 
ageing,  it  indicates  that  the  budgetary  impact  of 
ageing  is  back  loaded  and  may  likely  continue 
increasing for some time after 2060. In Denmark's 
to  age-related 
case, 
government  expenditure  reaching  its  maximum  in 
2025  and  starting  to  decline  after  2045.  For  other 
countries,  the  structure  of  ageing  and  the  social 
protection  arrangements  in  Member  States  drive 
the  higher  contribution  to  S2  than  S1  of  the  LTC 
component.  Other  things  being  equal,  countries 
that are due to undergo most of their ageing in the 
near  future  do  not  show  as  large  a  disparity 
between  the  contribution  of  ageing  on  the  two 
indicators. Equally, the institutional setup in place 
plays a crucial role as to how the ageing translates 
into costs, with a flatter profile for countries whose 
pension 
the 
government sector. 

arrangements 

costs 

limit 

to 

1.4. 

THE INITIAL BUDGETARY POSITION 

Aside  from  the  long-term  costs  of  ageing  (LTC) 
the  current  budgetary  and  debt  position  also 
contribute  to  the  sustainability  gap  for  a  majority 
of  countries.  According  to  the  initial  budgetary 
position  (IBP)  component  of  both  S2  and  S1 
indicators  and  the  debt  requirement  (DR) (15)  for 
S1, only one fifth of Member States have an initial 
fiscal position which would be sustainable if long-

(15)  The  initial  level  of  debt  enters  the  IBP  term,  as  it 
determines  the  required  primary  surplus  to  service  it. 
However,  it  also  directly  enters  the  S1  indicators  through 
the additional effort required to bring debt to 60% of GDP 
by 2060. 

Quantitative sustainability results 

Chapter III 

term costs were left aside. Another third require an 
adjustment  of  up  to  around  3%  of  GDP  to  the 
structural  public  balance  to  place  their  public 
finances  on  a  sustainable  path,  even  before 
considering  the  long-term  budgetary  impact  of  an 
ageing  population.  The  remaining  Member  States 
have an initial fiscal position that would require an 
even greater adjustment. 

According  to  the  IBP  component  of  S2  indicator, 
for the Czech Republic, France, Lithuania, Poland, 
Portugal,  Slovenia  Slovakia  and  Romania,  the 
required  correction  is  in  the  region  of  3  to  5%  of 
GDP.  For  Spain  it  is  slightly  above  6%  of  GDP, 
while  Latvia,  UK  and  Ireland  –  given  their  very 
large  structural  imbalances  in  2009  –  require 
adjustments of over 8% of GDP.  

in 

is  used 

therefore  stripped  out  of  from 

The  IBPs  are  calculated  using  the  budgetary 
position  of  2009  –  drawn  from  the  European 
Commission  spring  forecasts (16)  from  May  2009. 
–  as  starting  point.  As  discussed  in  Chapter  I,  the 
structural  primary  balance 
the 
calculation  of  the  sustainability  gap  indicators. 
This removes the estimated effect of the economic 
cycle  from  the  primary  balance  and  also  removes 
the  effect  of  one-off  measures.  Some  of  the 
automatic effect of the economic crisis on budgets 
the  data. 
is 
However,  structural  adjustment  can  only  be 
undertaken  imperfectly  and  this  is  particularly  the 
case 
the  middle  of  such  unprecedented 
economic  times.  In  so  far  as  the  crisis  leads  to  a 
durable reduction in economic activity and growth, 
the  structural  deficit  and  sustainability  gaps  could 
be  underestimated.  However,  on  the  other  hand, 
some  of  temporary  stimulus  measures  adopted  by 
government  may  have  not  been  properly  filtered 
out when estimating the structural deficits and may 
currently  appears  as  deteriorating  the  structural 
deficits.  

in 

(16)  European Economy, 3 (4 May 2009). 

37 

 
                                                           
                                                           
European Commission 

Sustainability Report - 2009 

Table III.1.2:  Government structural balances (% of GDP) 

Structural balance

2004-2009 average
-1.8
1.0
-3.1
3.1
-2.2
-0.8
-2.6
-5.8
-0.9
-4.2
-3.8
-1.5
-4.4
-3.1
0.3
-6.4
-4.1
-0.8
-1.8
-4.9
-4.5
-4.1
-2.3
-3.5
2.5
0.8
-5.1
-2.7
-3.0

Difference between 
2009 and 2004
-1.9
-0.4
-2.2
-0.9
1.1
-3.0
-10.2
2.8
-7.5
-1.4
2.4
2.9
-8.1
-1.8
1.4
5.4
2.2
-1.5
-2.8
0.0
-0.5
-3.3
-3.2
-3.1
-1.8
-0.3
-6.1
-0.9
-1.5

2008 out-turn
-2.2
0.2
-3.4
4.2
-1.2
-4.1
-7.5
-6.5
-3.9
-4.3
-3.4
0.1
-5.8
-5.2
2.0
-4.5
-4.9
-0.5
-1.8
-5.3
-3.8
-7.9
-2.5
-4.7
2.8
1.7
-5.6
-2.8
-3.1

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EA-16
EU-27

Source: Commission services 

2009 forecast
-3.2
0.3
-4.0
1.2
-2.4
-1.0
-9.8
-5.7
-6.8
-5.5
-2.6
-2.1
-9.5
-4.3
0.6
-1.7
-3.6
-2.6
-3.2
-6.0
-5.5
-5.2
-4.9
-5.0
0.8
-0.5
-10.0
-3.9
-4.6

2010 forecast
-4.0
1.6
-3.7
-0.4
-3.9
-1.9
-12.2
-4.7
-8.2
-5.5
-2.8
-2.1
-11.5
-5.5
0.1
-2.0
-2.8
-4.3
-3.8
-5.6
-5.1
-4.7
-5.2
-4.7
-0.7
-1.9
-12.2
-4.7
-5.5

While the long-term consequences of the crisis on 
the  economies  and  public  finances  of  the  EU 
Member  States  are  still  unclear,  the  debt  and 
deficit  figures  that  contribute  to  deriving  the  IBP 
and DR indicators, as well as the growth and other 
assumptions  going  forward  are  therefore  liable  to 
change. 
the 
macroeconomic environment and its consequences 
are presented in Chapter IV.  

Alternative 

scenarios 

for 

In order to look at the role of the initial structural 
balance  in  more  detail,  Table  III.1.2  shows  how 
this has changed in recent years. The first column 
shows  the  average  for  the  2004-09  period,  the 
second the absolute difference and finally the 2008 
outturn,  and  forecasts  for  2009  and  2010.  Overall 
just  under  one  quarter  of  Member  States  have 
improved  their  structural  balance,  and  on  average 
the  structural  balance  for  the  EU-27  and  for  the 
Euro  Area  countries  deteriorated  by  1.5  and  0.9 
percentage  points  of  GDP  respectively  between 
2004 and 2008. 

this 

that 

and  Sweden have had  a  loosening of under  1 p.p. 
of GDP between 2004 and 2008; Belgium, France, 
Lithuania, Netherlands and Finland between 1 and 
2  p.p.  of  GDP;  the  Czech  Republic,  Estonia, 
Austria,  Romania,  Slovenia  and  Slovakia  2  and  5 
p.p. and Ireland, Spain, Latvia and UK over 5 p.p. 
of GDP. According to the IBP component, most of 
these  countries  have  large  sustainability  gaps, 
indicating 
loosening  has  been  an 
important  contributor  to  the  fiscal  adjustment  that 
needs  to  occur  for  sustainability  to  be  ensured  in 
the future. This can also be seen by observing the 
size of the structural balance in Table III.1.2 as the 
link between  the  initial  structural  primary  balance 
and  the  sustainability  indicators  is  direct  –  a 
change  in  the  structural  balance  feeds  into  an 
equivalent 
the 
increase  or  decrease 
sustainability gap indicator. Conversely, a number 
of  countries,  and  in  particular  Hungary  and 
Cyprus, have strengthened their structural balances 
significantly. 

into 

Amongst Member States with a deterioration in the 
structural  balance,  Bulgaria,  Denmark,  Portugal 

It  is  now  evident  that  the  fiscal  deficits  are 
deteriorating substantially in 2009 relative to 2008 
and  a  further  weakening  of  the  public  balance 

38 

 
 
 
beyond  the  effects  of  the  business  cycle  is 
projected  for  2010.  The  expected  deterioration  in 
the structural balances can be seen in Table III.1.2. 
While  the  average  structural  balance  for  2008 
stood at –3.1% for EU-27, in 2009 it is expected to 
be –4.6% before falling further to –5.5% in 2010. 
Thus,  if  2010  was  used  as  the  base  year  for  the 
analysis  in  this  report,  the  results  would  indicate 
greater  sustainability  gaps  caused  by  the  weaker 
starting balances.  

1.5. 

REQUIRED PRIMARY BALANCE 

It  is  informative  to  see  the  size  of  the  primary 
balance  required  to  close  the  sustainability  gaps; 
that  is,  to  account  for  the  costs  of  ageing  and  the 
interest on current stock of debt.  In other words, to 
see  what  a  sustainable  budgetary  position  looks 
like. 

This  is  given  by  the  required  primary  balance 
(RPB). The RPB represents the structural primary 
balance  that  would  be  necessary  at  the  beginning 
of  the  long-term  projections  to  ensure  long-term 
sustainability  in  the  light  of  these  liabilities,  once 
all  other  spending  has  been  covered.  The  RPB  is 
usually  calculated  as  an  average  over  five  years: 
the RPB for the years 2011-2015 is shown in Table 
III.1.2,  along  with  the  structural  primary  balance 
and 
in  age-related  expenditure 
between 2010 and 2060. 

increase 

the 

Quantitative sustainability results 

Chapter III 

Table III.1.3:  Required primary balance (% GDP) 

Structural primary 
balance

Required primary 
balance

Increase in age-related 
expenditure

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

2009
0.7
1.1
-2.9
2.8
0.6
-0.6
-7.6
-0.9
-5.2
-2.7
2.0
0.2
-8.1
-3.1
1.2
3.1
-0.2
0.0
-0.2
-3.1
-2.4
-3.7
-3.3
-3.7
2.1
0.9
-7.8
-2.0
-0.9

average 2011-2015
5.9
2.3
4.6
1.9
5.0
0.3
7.2
12.7
6.4
2.8
3.4
8.9
2.2
4.2
13.6
3.5
6.3
6.5
4.5
1.1
3.0
5.4
8.4
4.0
5.5
3.1
4.5
4.5
4.9

between 2010 and 2060
5.9
3.2
6.3
1.0
5.1
-0.1
8.7
16.0
8.0
2.1
1.6
10.7
1.3
6.0
16.2
3.3
9.2
6.7
4.0
-1.2
2.8
8.5
12.5
5.5
5.4
2.4
4.8
4.4
4.8

Source: Commissions services 

The  table  shows  that  there  is  significant  variation 
in terms of the RPB across Member States. While 
for EU-27 it will represent an average of 4.5% of 
GDP,  and  4.9%  for  the  Euro  Area,  the  figures 
range  from  under  2%  of  GDP  for  Estonia, 
Denmark  and  Poland,  to  over  10%  of  GDP  for 
Greece  and  Luxembourg.  Twelve  Member  States 
will  require  a  primary  balance  of  5%  of  GDP  or 
over. 

For several countries, the RBP is so large that it is 
socially  and  politically  unrealistic  to  reach  and 
sustain;  they  are  well  above  the  largest  primary 
surpluses ever recorded in any EU Member State. 
For  these  countries,  an  effort  of  consolidation  in 
the  medium-term,  even  if  very  ambitious  would 
not  suffice  to  put  the  public  finances  on  a 
sustainable path without profound reforms of their 
social protection systems. 

1.6.  GOVERNMENT DEBT PROJECTIONS 

The  analysis  of  sustainability  presented  so  far 
looks  at  the  adjustment  of  the  structural  primary 
balance  required  to  ensure  sustainability  in  terms 
of  the  S2,  S1  or  RPB  indicators.  An  alternative 
way  of  looking  at  sustainability  is  to  consider  the 
trajectory  of  debt,  if  such  an  adjustment  were  not 
undertaken.  The  results  of 
this  exercise  are 
presented  in  Graph  III.1.2  and,  in  more  detail,  in 

39 

 
 
 
government  debts  to  enter  into  an  exponentially 
increasing spiral.  

Table III.1.4:  Projected debt developments 

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

2008
89,6
14,1
29,8
33,3
65,9
4,8
43,2
97,6
39,5
68,0
105,8
49,1
19,5
15,6
14,7
73,0
64,1
58,2
62,5
47,2
66,4
13,6
22,8
27,6
33,4
38,0
52,0
63,0
68,6

2009
94,9
16,0
33,0
29,8
72,4
10,1
60,0
104,6
48,1
78,5
113,3
44,8
30,9
24,0
14,9
84,1
68,4
55,3
69,3
53,9
73,8
21,8
27,2
32,0
37,5
41,6
64,0
70,6
75,8

Gross debt
2010
98,6
18,6
37,0
26,4
75,1
13,9
75,8
111,6
55,6
83,8
116,7
42,4
42,4
34,1
13,7
89,0
72,6
58,0
72,7
60,4
78,9
30,4
30,7
36,3
40,0
40,8
71,2
75,2
80,0

2030
137,8
-9,9
114,9
11,3
102,5
28,5
260,8
205,9
188,2
177,4
112,2
67,8
230,6
113,9
35,6
21,8
114,0
121,0
116,7
108,9
156,1
125,1
158,8
115,5
61,3
32,2
271,3
155,9
140,2

2060
372,4
9,8
486,7
18,3
318,9
81,4
848,5
884,0
766,6
431,3
205,9
335,5
898,1
545,9
437,5
-26,3
432,5
450,3
337,8
318,4
389,9
633,8
831,6
561,2
248,7
93,1
759,2
477,3
422,3

The government debt ratio is usually compiled in gross terms, without 
netting out assets from government liabilities. Gross debt can therefore 
never be negative. Moreover, the projections is this table assumes that 
the accumulation of financial assets is nil for countries with debt. In this 
table, the negative values should be interpreted as net accumulation of 
assets for the countries that would fully reimburse their debts. Although 
the assumption of no accumulation of assets until the full repayment of 
debt is not plausible, it has no implications on the sustainability 
assessment provided the interest rate paid on government debt and the 
rate of return on government assets are similar. 

Source: Commission services 

European Commission 

Sustainability Report - 2009 

Table  III.1.4.  The  table  shows  the  government 
gross  debt  ratio  in  2008  and  2009,  and  the 
projections  for  2010,  2030  and  2060,  once  the 
costs  of  servicing  debt  and  paying  for  age-related 
expenditure  are  taken  into  account.  In  a  sense,  it 
represents the stock measure of the flow indicators 
S2 and S1. 

Graph III.1.2:  Gross debt (% of GDP) 

EU27

EA

)
P
D
G

f
o
%

(

t
b
e
d
s
s
o
r
G

500

450

400

350

300

250

200

150

100

50

2007

2012

2017

2022

2027

2032

2037

2042

2047

2052

2057

Source: Commission services 

In  2008,  the  government  gross  debt-to-GDP  ratio 
stood  above  60%  mark  for  the  Euro  Area  on 
average and for eight of the 27 EU Member States. 
These  countries  are  Belgium,  Greece,  France, 
Italy,  Hungary,  Malta,  Austria  and  Portugal. 
However,  Ireland,  Spain,  Poland  and  UK  are  also 
forecast  to  reach  or  exceed  this  debt  ratio  by  the 
end of 2010. 

On  unchanged  policy  relative  to  2009,  by  2060 
Bulgaria,  Denmark,  Hungary,  Italy  and  Sweden 
would  have  reduced  their  debt  ratios.  Conversely, 
the  spectacularly  high  debt  projections  for  the 
majority  of  other  countries  indicate  unsustainable 
policies and illustrate the magnitude of the issue. 

As  already  mentioned  elsewhere  in  the  report, 
these 
long-term  debt  projections  have  been 
prepared under a no-policy-change assumption and 
in partial equilibrium. Given that assumption, these 
projections  are  not  robust  forecasts  and  are  not 
meant to be realistic scenarios of what may happen 
in  the  future.  In  practice,  it  is  extremely  unlikely 
that  financial  markets  would  keep  financing 
government debt which amounted to several times 
the  annual  GDP  of  a  country,  or  that  government 
would not change their policies in the presence of 
ever  increasing  debts.  The  aim  of  the  debt 
projections is to illustrate the long-term trends and 
the  size  of  the  required  remedial  action  to  avoid 

40 

 
 
 
 
 
 
 
 
2.  COMPARISON WITH THE 2006 SUSTAINABILITY REPORT 

Conversely,  there  has  been  a  slight  improvement 
by 0.1 p.p. of GDP in the LTC component of S2. 
Almost  half  of  Member  States 
show  an 
improvement  on  this  component.  Notable  outliers 
are Luxembourg, Malta and Greece where changes 
in the estimate of the LTC are equal to 3.6, 4.6 and 
9.9  points,  respectively.  In  Greece's  case,  this  is 
largely  explained  by  the  fact  that  the  2006 
estimates  did  not  include  pension  expenditure  as 
projections  were  not  available  at  that  time.  For 
Luxembourg,  the  required  adjustment  given  the 
long-term costs (LTC) now takes into account the 
pension expenditure that should be paid out to non-
residents, while in 2006 this was omitted.  

Table III.2.1 shows the LTC component of the S2 
indicator calculated until 2050 and 2060, as well as 
the  difference  between  the  two  and  the  S2 
sustainability  gap.  It  aims  to  complement  the 
analysis presented in Graph III.2.1 by showing the 
evolution  of  the  LTC  due  to  the  increase  in 
expenditure  in  the  years  after  2050.  The  figures 
show  that  on  average  there  is  little  difference 
between  the  LTC  until  2050  and  until  2060.  For 
EU-27 the difference equals 0.3 points on average, 
while for the Euro Area, the difference is 0.1 p.p. 
of GDP. Little of the difference between the results 
presented in this report and those presented in the 
therefore  be 
2006  Sustainability  Report  can 
attributed to the additional costs of ageing beyond 
2050.  However,  it  suggests  that,  on  the  basis  of 
current projections, the ratio-to-GDP of age-related 
expenditure  will  keep  increasing  beyond  2060  for 
most.  However,  it  should  be  noted  that  the 
relationship  between  the  cost  of  ageing  and  the 
LTC  depends  on  the  discount  rates  and  the  time 
profile  of  the  spending  increases.  For  individual 
Member  States,  however,  there  is  more  variation 
with  some  such  as  Ireland,  Cyprus  and  Malta 
having a significant increase in their sustainability 
gap  due  to  the  effect  of  the  additional  costs  of 
ageing beyond 2050. 

The  results  in  this  report  differ  significantly  from 
those  presented  three  years  ago  in  the  2006 
the  EU-25  (17) 
Sustainability  Report.  While 
average  sustainability  gap  was  estimated  3.4%  of 
GDP on S2,  the  current  estimates  are  for 6.5% of 
GDP. 

Graph III.2.1 compares the S2 indicator calculated 
in this report with the one of 2006. The difference 
between S2 in the 2006 and 2009 reports is split in 
three  components:  (i)  the  difference  that  is  due  to 
changes  in  the  initial  budgetary  position,  (ii)  the 
difference  that  owes  to  the  revision  in  the  long-
term projection of age-related expenditure because 
of  new  demographic  projections  and  a  number  of 
improvements  in  the  projection  methods,  and 
(iii) the  fact  that  the  long-term  projections  have 
been extended from 2050 to 2060. 

On average, the sustainability gap has increased by 
3.1  percentage  points  (p.p.)  of  GDP  for  the  25 
countries  that  were  members  of  the  EU  in  2006. 
While  4  Member  States  (Hungary,  Portugal,  Italy 
and  Germany)  show  a  lower  sustainability  gap 
than  in  the  2006  exercise,  the  remaining  21 
Member  States  show  a  deterioration.  Of  these,  in 
all  cases  expect  Luxembourg,  Greece  and  Malta, 
the deterioration is essentially due to a weakening 
of  the  initial  budgetary  position  rather  than  to  an 
increase  in  the  age-related  costs  and  the  delay  in 
the required adjustment that leads to a higher LTC. 
For  Ireland,  Spain,  Latvia  and  UK  the  weakened 
initial  budgetary  position  is  responsible  for  an 
increase of the estimated sustainability gap of over 
5 points.  

Overall, for the EU-25 countries, the deterioration 
in  S2  is  due  to  the  worsening  in  the  starting 
budgetary position. The required adjustment given 
the  starting  position  has  increase  by  3.2  p.p.  of 
GDP  between  the  2006  and  2009  reports,  as  the 
base  year  for  the  analysis  changed  from  2005  to 
2009.  The  fiscal  impact  of  the  economic  and 
financial  crisis  is  therefore  included  in  the  2009 
estimates  and explains  the worse  initial  budgetary 
position.  

(17)  The  comparison  in  sustainability  indicators  estimated  in 
2006  and  2009  concerns  25  countries,  since  Bulgaria  and 
Romania joined the EU in 2007 after the publication of the 
2006 sustainability report. 

41 

 
                                                           
European Commission 

Sustainability Report - 2009 

Graph III.2.1:  S2 indicator in the baseline scenario compared to the results of the 2006 Sustainability Report 

13
12

11
10
9

8
7
6
5

4
3
2

1
0
-1

-2
-3
-4
-5

-6
-7
-8

-9
-10

Difference due to IBP

Difference due to LTC

Residual (extension of projection 2050-60)

Total difference between 2006 and 2009 reports

HU PT

IT DE CY FR DK CZ EA SE EU25 LU PL BE EE SK AT

FI

SI

LT NL MT UK ES LV EL

IE

Source: Commission services 

Table III.2.1:  LTC component of the S2 indicator until 2050 and 

2060 

LTC

until 2050
4.6
1.1
2.9
1.8
3.0
-0.2
5.3
10.8
5.4
1.9
1.9
6.6
1.0
2.6
11.9
1.0
4.5
5.0
3.1
-1.3
1.6
4.4
7.7
2.3
4.3
1.2
2.6
2.9
3.4

until 2060
4.8
1.5
3.7
1.4
3.3
-0.1
6.7
11.5
5.7
1.8
1.5
8.3
1.0
3.2
12.9
1.5
5.7
5.0
3.1
-1.2
1.9
4.9
8.3
2.9
4.5
1.6
3.6
3.2
3.5

Difference in LTC 
2050 - 2060
0.1
0.4
0.8
-0.4
0.3
0.0
1.4
0.7
0.4
-0.1
-0.5
1.6
0.0
0.6
1.0
0.5
1.2
0.0
0.0
0.0
0.3
0.5
0.7
0.6
0.2
0.4
0.9
0.3
0.1

S2 
until 2060
5.3
0.9
7.4
-0.2
4.2
1.0
15.0
14.1
11.8
5.6
1.4
8.8
9.9
7.1
12.5
-0.1
7.0
6.9
4.7
3.2
5.5
9.1
12.2
7.4
4.0
1.8
12.4
6.5
5.8

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

Source: Commission services 

42 

 
 
 
 
 
 
3. 

THE COST OF NO POLICY REACTION 

The  results  of  the  sustainability  gap  exercise 
present  a  policy  challenge  for  the  nearly  all  the 
Member  States.  On  average,  policies  are  required 
that will close a sustainability gap equal to 6.5% of 
GDP,  with  a  half  of  this  effect  being  due  to  the 
long-term  costs  of  ageing.  This  can  be  achieved 
through  some  combination  of  a  reduction  in  the 
additional  costs  of  ageing,  an  increase  in  tax,  a 
reduction in non-age related spending or structural 
reforms that slows down age-related expenditure. 

indicators  show 

the 
The  sustainability  gap 
correction that is required for the years covered by 
the  analysis.  Implicitly,  the  gap  given  by  the 
indicators  is  the  size  of  the  correction  that  must 
occur  now  and  be  maintained  for  the  years  until 
2060 and beyond.  

If the correction were to be undertaken later, then 
countries  with  a  sustainability  gap  would  need  to 
make  a  greater  adjustment.  Table  III.3.1  presents 
this additional cost of delay – that is the increase in 
the  S1  and  the  S2  indicators.  It  shows  how  much 
greater the adjustment would have to be, if it were 
undertaken  in  5  years’  time  rather  than  now.  For 
ease  of  comparison  it  also  shows  the  S2  gap 
presented  in  Table  III.1.1  and  the  size  this  would 
be with a 5-years delay. For the EU on average, a 5 
year  delay  would  result  in  an  additional  required 
adjustment of 0.5 percentage points of GDP being 
necessary to ensure sustainability according to the 
S2 indicator. 

For  twelve  Member  States,  the  additional  cost  of 
delayed  response  is  greater  than  0.5  p.p.  of  GDP. 
These  countries  are  the  Czech  Republic,  Ireland, 
Spain,  Latvia,  Lithuania,  Malta, 
Greece, 
Netherlands, Romania, Slovenia, Slovakia and the 
UK.  For  Greece  and  Slovenia,  the  cost  of  delay 
thus 
exceeds  1  percentage  point  of  GDP, 
sizeable 
significantly 
sustainability gap. 

increasing  an  already 

The  absolute  additional  costs  in  terms  of  required 
adjustment of the delay is related to the size of the 
sustainability  gap  and  the  government  gross  debt 
but  its  relative  size  also  depends  on  the  projected 
economic growth in the future. 

Table III.3.1:  Cost of delaying the response by 5 years 

Cost of delay ( % of GDP)

Sustainability gap

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

S1
0.7
-0.1
0.8
-0.1
0.5
0.0
1.5
1.6
1.3
0.8
0.3
0.5
1.4
0.8
0.8
-0.2
0.7
0.8
0.6
0.4
0.7
0.9
1.4
0.8
0.4
0.1
1.5
0.8
0.7

S2
0.3
0.1
0.6
0.0
0.4
0.1
0.7
1.1
0.8
0.3
0.1
0.4
0.9
0.7
0.5
0.0
0.6
0.6
0.3
0.3
0.4
0.8
1.1
0.7
0.3
0.1
0.7
0.5
0.4

original S2
5.3
0.9
7.4
-0.2
4.2
1.0
15.0
14.1
11.8
5.6
1.4
8.8
9.9
7.1
12.5
-0.1
7.0
6.9
4.7
3.2
5.5
9.1
12.2
7.4
4.0
1.8
12.4
6.5
5.8

S2 delayed
5.7
1.0
8.1
-0.3
4.6
1.0
15.7
15.1
12.6
5.9
1.5
9.2
10.8
7.8
13.1
-0.1
7.6
7.5
5.1
3.5
5.9
9.9
13.3
8.1
4.3
1.9
13.1
6.9
6.2

Source: Commission services 

fairness 

intergenerational 

The results presented in Table III.3.1 make it clear 
that  inaction  carries  a  cost.  Moreover,  there  is  a 
question  of 
to  be 
considered. The additional costs of ageing will fall 
at  least  in  part  on  future  taxpayers  for  countries 
with a sustainability gap. By closing the gap later, 
more  of  the  burden  is  incumbent  on  future 
taxpayers  rather  than  current  ones  and  the  burden 
is greater in absolute terms too. 

The  cost  of  delay  indicates  show  the  increase  in 
the  sustainability  gap  if  no  remedial  action  is 
taken. In so far as the crisis and the fiscal support 
that is necessary in support of the recovery do not 
allow  an  ambitious  fiscal  consolidation  effort  in 
the  short-  to  medium  term,  the  relentless  increase 
in  the  sustainability  gaps  suggests  the  urgency  in 
considering  in  earnest  profound  reforms  in  social 
protection  system,  even  if  the  impact  of  those 
reforms  may  take  time  to  appear  in  government 
accounts. 

43 

 
 
 
  
 
Chapter IV 
The potential impact of the current economic 
crisis and sensitivity analysis 

 
 
SUMMARY 

in 

this 

The  baseline  analysis 
report  uses 
projections  for  potential  growth  that  do  not  take 
into  account  any  durable  effect  of  the  ongoing 
financial  and  economic  crisis.  Instead,  the  pre-
crisis potential growth estimate is forecast forward 
taking  changing  demographics  into  account.  This 
chapter presents three alternative growth scenarios 
for  the  medium  and  long  terms  in  the  light  of  the 
economic crisis and then shows the corresponding 
estimates of the sustainability gaps. 

The  financial  and  economic  crisis  has  already  led 
than  expected  macro-
to  significantly  worse 
economic  and  fiscal  developments  in  2008  and 
2009.  While 
the  prospects  for  2010  appear 
disappointing,  there  is  also  marked  uncertainty 
regarding  economic  growth  in  the  medium  and 
long-term  perspective.  The  unusually  sharp  and 
rapid  deterioration 
in  economic  activity  has 
transformed into a world recession. This poses the 
question of the extent to which the worsened short-
term  outlook  would  have  implications  for  the 
growth  potential  of  the  EU  economies  also  over 
the medium- and longer-term. 

Of  the  three  alternative  scenarios  presented,  the 
first  one  assumes  that  it  will  take  a  decade  for 
potential  output  to  reach  its  pre-crisis  growth  rate 
leading  to  a  ‘lost  decade’  of  growth.  If  this 
situation were to materialise, the sustainability gap 
would  be  some  1.2  percentage  points  (p.p.)  of 
GDP  higher  on  average,  purely  due  to  the  effect 
that lower GDP growth over ten years and a lower 
level  of  GDP  thereafter  has.  While  lower  growth 
means  that  employees  will  accrue  lower  pension 
entitlements,  the  effect  on  pensions  will  be  more 
modest  than  on  overall  output,  leading  to  higher 
pension spending as a share of GDP.  

Of course the ‘lost decade’ scenario may prove to 
be  too  pessimistic.  However,  as  long  as  the  crisis 
has a long-term impact on the level of output of the 
economy, the baseline sustainability indicators will 
prove to have been underestimates of the true gaps. 

The  economic  crisis  means  that  any  measures  to 
address  the  long-term  sustainability  difficulties 
will need to be carefully thought through to ensure 
that  they  do not  lead  to  short-term  choking  of  the 
recovery.  If  action  had  been  taken  in  previous 
years,  and  Member  States  had  attained 
the 
medium-term  objectives  (MTOs)  that  were  in 
place  for  the  previous  cycle  of  stability  and 

convergence programmes, then, most sustainability 
gaps would have been closed. 

the  results  of  a 
This  chapter  also  presents 
sensitivity  analysis,  which  considers  the  effect  on 
the  estimates  of 
the  sustainability  gaps  of 
alternative scenarios for demographics and for the 
costs  of  providing  health  and  long-term  care  for 
the  elderly.  By  looking  at  different  scenarios  for 
longevity,  health 
status  and  health  costs, 
productivity,  labour  market  scenarios,  interest 
rates, long-term care needs and costs, it provides a 
sense of how the assumptions made in the baseline 
affect  the  final  outcome  and  the  robustness  of  the 
estimates.  

47 

 
1. 

THE EFFECT OF THE FINANCIAL CRISIS 

The  assessment  of  the  sustainability  conditions  in 
each of the EU member states requires very long-
term  projections  for  demographic  developments, 
interest  rates  and  labour  market,  macroeconomic 
and  fiscal  situation.  Given  the  relatively  large 
margins  of  error  surrounding  each  of 
those 
projections,  this  chapter  considers  a  series  of 
It  starts  by  presenting 
sensitivity  analyses. 
alternative  growth  scenarios  for  the  post-crisis 
years  and  then  discusses  the  uncertainty  linked  to 
them.  It  then  turns  to  other  issues  like  the 
demographic  projections,  productivity  growth, 
unemployment  and  interest  rates.  This  allows  an 
assessment  of  the  robustness  of  the  sustainability 
indicators  and  a  better  understanding  of  the  long-
term sustainability risks in each country. 

Under a conventional business cycle interpretation, 
a  period  of  low  growth  would  be  followed  by  a 
period  of  above  trend  growth.  Given  the  severity 
and  scope  of  the  current  crisis,  however,  there  is 
however  the  serious  risk  of  a  structural  break  in 
growth  conditions  and  that  the  recovery  will  be 
characterised  by  a  protracted  period  of  slow 
growth,  and  reduction  in  potential  GDP  growth. 
This  might  be  due  to  a  number  of  factors, 
including: 

Increases  in  the  cost  of  capital  due  to  the  real 
economy  effects  of  balance-sheet  adjustments  in 
the  financial  sector,  even  in  the  presence  of  large 
recapitalisation packages; 

1.1. 

THE PERSPECTIVES FOR ECONOMIC 
GROWTH 

The  baseline  GDP  growth  forecasts  used  in  the 
main  analysis  do  not  take  account  any  durable 
implications  of  the  economic  and  financial  crisis 
on  economic  activity.  This  section  presents  the 
alternative  economic  assumptions  in  the  light  of 
the crisis that will be used to look at the impact it 
might  have  on  the  long-term  sustainability  of  the 
Member States of the European Union. 

The  financial  and  economic  crisis  has  already  led 
to  significantly  worse 
than  expected  macro-
economic  and  fiscal  developments  in  2008  and 
2009.  While  a  number  of  forecasters  are  now 
starting  to  revise  upwards  growth  forecasts  for 
2010, economic growth for the EU as a whole and 
for  each  Member  States  will  remain  quite  low  or 
even  negative.  Moreover,  there  is  also  marked 
uncertainty  regarding  economic  growth  in  the 
medium and long-term perspective. The unusually 
sharp  and  rapid deterioration  in  economic  activity 
has transformed into a world recession. This poses 
the  question  of  the  extent  to  which  the  worsened 
short-term outlook would have implications for the 
growth  potential  of  the  EU  economies  also  over 
the medium- and longer-term.  (18) 

(18)  It should be borne in mind that estimating potential output 
growth is subject to uncertainty and that different methods 
for  doing  so  exists.  While  in  principle  only  structural 
factors matter for the estimation of the growth potential, it 

48 

credit 

constraints 

Wide-spread 
and  higher 
borrowing  costs  in  the  non-financial  sector  in  the 
light  of  the  restructuring  of  banks. (19)  Moreover, 
there  may  be  a  possible  shift  in  attitude  to  risk 
leading  to  a  structurally  and  permanently  higher 
cost of capital; 

Slower growth in total factor productivity due to a 
reduction  in  investment,  which  can  have  a  lasting 
effect; 

A  permanent  loss  of  human  capital  due  to  long 
term  unemployment  in  the  event  of  a  protracted 
slow-down  (the  hysteresis  effect).  This  may  be 
more  likely  in  the  relatively  inflexible  EU  labour 
markets; 

A collapse in world trade and higher protectionism 
could  have  a  particularly  adverse  effect  on  EU 
growth (and especially export-oriented countries); 

A  wide-ranging  lack  of  confidence  leading  to  the 
postponement  of  household  consumption  and 
investment by firms; 

A lasting increase in the weight of government in 
the  economies,  with  a  heavier  tax  burden  that  is 

is very difficult to distinguish cyclical and structural factors 
in real time. This is all the more the case in times of rapid 
changes  in  economic  activity  or  structural  breaks,  like  for 
instance  at  the  current  juncture.  For  this  reason,  real-time 
estimates  of  potential  growth,  and  of  output  gaps,  need  to 
be interpreted with caution.  

(19)  Although  EU  consumers  have  lower  deleveraging  needs 
than US consumers, firms are more heavily indebted. 

 
                                                           
                                                                                   
The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

Graph IV.1.1:  Potential GDP growth compared: different crisis scenarios (annual % change) 

4

3.5

3

2.5

2

1.5

1

0.5

0

Rebound

Lost decade

Permanent shock

Baseline

2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059

Source: Commission services 

necessary  to  finance  the  increase  in  government 
expenditure and debt. 

‘baseline’  and  most  indicators  in  this  report  are 
based  on  that  scenario,  it  appears  at  this  stage  an 
overoptimistic scenario. 

1.2. 

THREE MEDIUM-TERM POST-CRISIS 
SCENARIOS 

In  order  to  look  at  the  possible  effects  of  the 
economic  crisis,  three  scenarios  for  medium  and 
long  terms  economic  growth  have  been  modelled 
in  addition  to  the  baseline  scenario.  These  are 
presented in Graph IV.1.1 for EU 27. It should be 
noted, that the trajectory of growth differs between 
Member  States  and  that  the  EU27  average  may 
hide  substantially  different  developments  and 
prospects among member states. (20)  

The baseline scenario shows a gradual reduction in 
potential  growth  due  to  population  ageing,  as 
explained  in  previous  chapters.  This  scenario 
assumes that the loss in output in 2008–10 is of a 
cyclical nature without a durable impact on current 
and  projected  potential.  This  scenario  is  basically 
the  same  that  one  could  have  prior  to  the 
emergence  of  the  crisis.  Though  it  is  labelled 

(20)  The calculations for the alternative  scenarios are based on 
the  Commission's  spring  2009  forecasts  of  May  2009  and 
therefore an update on those presented in the 2009 Ageing 
Report, which were based on the January 2009 forecast. 

The first alternative scenario, ‘the rebound,’ is also 
of an optimistic nature. Though it acknowledges a 
loss  in  potential  growth  as  measured  by  the  usual 
techniques,  during  the  crisis  years,  it  assumes  a 
rebound in potential growth the years until 2020 or 
so,  with 
longer-term  outcomes  being 
unchanged. 

the 

The ‘lost decade’ scenario shows potential growth 
taking  ten  years  to  return  to  its  pre-crisis  level; 
both  labour  productivity  and  labour  input  are 
assumed to reach the baseline growth rate in 2020. 
Thereafter  it  follows  the  same  path  as  in  the 
absence of the crisis, but the output lost during the 
crisis years is definitely lost. 

The  most  pessimistic  scenario  is  the  ‘permanent 
shock’  scenario,  where  not  only  is  there  no 
rebound,  but  there  is  a  permanent  hit  to  potential 
labour 
growth  going  forward.  In 
productivity  growth  and  labour  input  are  assumed 
to  be  permanently  lower  due  to  the  crisis.  This 
appears to be an over pessimistic scenario. 

this  case, 

49 

 
                                                           
European Commission 

Sustainability Report - 2009 

Table IV.1.1:  The effects on the level of real GDP per capita of the three post-crisis scenarios 

Rebound
Lost decade
Permanent shock

Source:  Commission services 

2010
-2
-2
-2

EU27 Level of GDP per capita, difference from baseline in %
2020
0
-11
-12

2040
0
-11
-16

2015
-6
-9
-9

2060
0
-11
-20

  Box IV.1.1: Estimating the impact on pension spending of changes in macroeconomic 
variables.

For  the  analysis  in  this  report,  the  potential  budgetary  impact  of  varying  the  underlying
assumptions  (productivity,  employment)  on  pension  spending,  is  estimated  by  the  Commission
using  the  sensitivity  scenarios  on  the  labour  productivity  growth  rate  and  the  structural
unemployment rate, rather than by the Member States using the national pension models.  

The  elasticity  of  public  pension  expenditure  with  respect  to changes  in  GDP  is  calculated  as
follows:  

scenario

.ε
alt
t

=

where:    

scenario

baseline

P
−
t
baseline

⎞
⎟⎟
⎠
baseline

alt

.

alt

.

P
t

⎛
⎜⎜
⎝
GDP
t

⎛
⎜⎜
⎝

P
t
scenario

GDP
t

GDP
t

−
baseline

(1) 

⎞
⎟⎟
⎠

P: pension expenditure (level) 
GDP: GDP (level) 
alt.scenario: the higher labour productivity scenario and the higher employment
rate scenario, respectively 

This  elasticity  is  time-varying  so  as  to  capture  potential  changes  over  time  that  pension  reforms
might have induced in the relationship between GDP growth and pension expenditure.  

Using the estimated elasticity, the alternative 'crisis' scenario is imposed as the 'alt.scenario', and
the change in pension expenditure vis-à-vis the baseline is solved for. The alternative scenarios for
pension expenditure  carried out  in  the projection exercise relate to specific shocks (the  0.25  p.p
higher labour productivity growth rate and 1 p.p. lower structural unemployment rate). For shocks
of a different size, the calculated elasticity above can be used as a proxy  for the effect of such a
shock  on  pension  expenditure.  However,  it  should  be  noted  that  the  elasticity  with  respect  to  a
shock  of  a  different  size  might  be  different.  This  would  occur  if  there  are  non-linearities  in  the
relationship. This simple model does not reflect such cases. 

The effects on the level of real GDP per capita of 
the  three  scenarios,  relative  to  the  baseline  are 
shown in Table IV.1.1. As over the first few years, 
trend  growth  follows  the  2009  spring  forecasts  in 
all  cases,  the  initial  loss  in  GDP  by  2010  equals 
2%  in  all  cases.  Thereafter,  in  the  rebound 
scenario, GDP per capita continues to fall but has 

caught  up  by  2020  when  the  recover  is  complete. 
This  is  not  the  case  in  the  either  scenarios  where 
annual GDP growth over 2007-2020 is on average 
0.8-0.9%  lower  than  in  the  baseline.  In  the  lost 
decade  scenario,  despite  potential  growth  having 
reached  its  pre-crisis  level  by  2020,  the  years  of 
the  crisis  leave  a  level  effect  equal  to  11%  of  the 

50 

 
 
 
 
 
 
 
 
 
 
baseline GDP per capita. This will never be caught 
up.  The  permanent  effect  on  growth  in  the 
permanent  shock  scenario 
is  more  dramatic 
however;  in  this  case  the  lower  rate  of  growth 
leads  to  an  ever  increase  difference  in  level  in 
GDP  per  capita  going  forward.  While  in  2020 
GDP per capita is 12% lower than in the baseline, 
but 2060 it is 20% lower. 

1.3. 

THE BUDGETARY IMPACT OF THE POST-
CRISIS SCENARIOS 

The budgetary impact of the shocks on age-related 
expenditure  is  modelled  according  to  the  three 
scenarios and compared with the baseline.  

For  public  pension  expenditure,  the  sensitivity 
tests of the projections to a change in the structural 
unemployment rate and to the productivity growth 
rate  is  used  to  calculate  an  elasticity  of  public 
pension  with  respect  to  changes  in  output.(21) 
Details  are  provided  in  box  IV.1.1.  For  the  other 
age-related  government  expenditure  items,  the 
projections  were  obtained  re-running  the  different 
models (health care, long-term care, education and 
unemployment  benefits)  with 
respective 
the 
alternative macro-economic scenarios.  

impact 

the  budgetary 

The  magnitude  of 
is 
determined by the nature of the shock. As the lost 
decade  and  permanent  shock  scenarios  are 
negative  –  in  the  sense  of  implying  a  lower  GDP 
level – they lead to higher age-related expenditure 
as  a  share  of  GDP,  while  the  rebound  scenario  is 
neutral.  Graphs  IV.1.2  and  IV.1.3  show  the  effect 
of  the  three  potential  growth  scenarios  on  public 
pension  expenditure  and  the  overall  age  related 
expenditure,  cumulatively  over 
the  2007–60 
period. They show, that relative to the baseline, the 
permanent shock has a bigger impact than the lost 
decade  scenario,  while  the  rebound  scenario  is 
neutral overall, both for pension spending and the 
overall age related expenditure. 

(21)  The sensitivity tests carried out in the 2009 Ageing Report 

were used to calculate the elasticities.  

The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

Graph IV.1.2:  Potential impact of the budgetary crisis on pensions 

EU 27 pension expenditure, change in % of GDP between 2007-2060

+1.4

+0.9

+0.0

4

3.5

3

2.5

2

1.5

1

0.5

0

Baseline

Rebound

Lost decade

Permanent shock

Source: Commission services 

Graph IV.1.3:  The potential budgetary impact of the crisis on total 

age-related expenditure 

EU 27 age related expenditure, change in % of GDP between 2007-2060

+2.0

+1.4

+0.0

8

7

6

5

4

3

2

1

0

Baseline

Rebound

Lost decade

Permanent shock

Source: Commission services 

In the case of the rebound scenario, the additional 
costs  in  the  years  when  GDP  growth  in  at  below 
the  baseline  rate  are  offset  by  lower  costs  when 
GDP  growth  is  at  above  trend  growth.  In  the  lost 
decade  scenario,  pension  expenditure  is  0.9%  of 
GDP higher in 2060 relative to the baseline, while 
the age related expenditure is 1.4% of GDP higher, 
with  the  increases  occurring  between  2007  and 
2020,  before  gradually  falling.  In  the  permanent 
shock  scenario,  however,  the  increase  in  both 
pension  expenditure  and  the  overall  age  related 
expenditure are not only higher (at 1.4% and 2.0% 
of GDP respectively), but also continue increasing 
beyond 2020 into the future. 

1.3.1.  The dynamics of the impact of the crisis 

on public pension expenditure 

The  economic  crisis  leads  to  lower  nominal  GDP 
in the short term and, in the case of the lost decade 
and  permanent  shock  scenarios  lower  potential 
GDP levels relative to the baseline scenario going 
forward.  In  parallel,  public  pension  expenditure 

51 

 
                                                           
European Commission 

Sustainability Report - 2009 

Graph IV.1.4:  The dynamics of public pension expenditure (baseline versus lost decade scenario, % of GDP) 

Lost decade

Baseline

14

13

12

11

10

2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059

Source: Commission services 

will be lower than in the baseline scenario. Due to 
the design of contribution and entitlement systems 
and as pensions tend not to be indexed with wages, 
the  short-term  elasticity  of pension  expenditure  to 
GDP  is  less  than  1.  Pension  expenditure  will 
therefore fall less than GDP, leading to an increase 
in  pension  spending  as  a  share  of  GDP.  Over  the 
medium to long term, the estimated elasticity rises 
reflecting  the  fact  that  lower  contributions  due  to 
the  effects  of  the  crisis  eventually  lead  to  lower 
pension 
entitlements. 
expenditure  in  the  crisis  scenarios  vis-à-vis  the 
baseline  starts  therefore  to  fall  over  the  longer-
term. 

difference 

The 

in 

Graph  IV.1.4  shows  the  dynamics  of  public 
pension  expenditure  as  a  share  of  GDP  for  the 
baseline  and  lost  decade  scenarios.  It  shows  that, 
while overall pension spending as a share of GDP 
is  higher  in  the  lost  decade  scenario  than  in  the 
baseline scenario by 0.9 p.p. of GDP, most of the 
increase happens in the early years. Indeed, for the 
years  2020–60  the  lost  decade  scenario  has  a 
in  public  pension 
increase 
marginally 
spending relative to GDP – by 0.1 p.p. – as lower 
entitlements start to have an effect. 

lower 

Overall, the no-policy change assumption involves 
the  (partial)  indexation  of  pensions  alongside 
earnings-related  entitlements.  These  features  lead 

52 

to  the  crisis  scenarios  resulting  in  rising  and  then 
falling  level  of  pension  spending  as  a  share  of 
GDP.  

1.4. 

IMPLICATIONS ON SUSTAINABILITY 
INDICATORS OF THE ALTERNATIVE POST-
CRISIS CENARIOS 

Table  IV.1.2  shows  the  sustainability  gap,  as 
measured  by  S2  indicator,  estimated  for  the  three 
alternative scenarios. The results show the effect of 
the  different  outcomes  for  GDP  growth  on 
sustainability, but do not account for the additional 
costs associated with the fiscal cost of the recovery 
measures  which  will  add  to  the  stock  of  debt  and 
increase the primary surplus required to service the 
debt.  If  these  additional  costs  were  added  on,  an 
increase in the gap through the IBP component of 
the  order  of  magnitude  presented  in  the  last 
column  of  the  table  would  emerge.  While  this  is 
not  insignificant,  it  is  not  as  large  as  the  overall 
effect of ageing and is also highly uncertain as the 
final  fiscal  cost  of  the  crisis  will  depend  on  the 
ability of governments to recoup some or all of the 
funds  they  used  for  the  recapitalisation  of  banks 
and  on  which  share  of  contingent  liabilities  borne 
by the government in the context of the crisis (for 
example  State  guarantees  to  deposits  and  to 
liabilities issued by the banks) will materialise. 

 
The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

Table IV.1.2:  Sustainability calculations under alternative crisis scenarios 

Effect of different crisis scenarios on the S2 indicator and required primary balance (RPB)

Baseline
Level
IBP*
0.6
-0.6
3.7
-1.6
0.9
1.1
8.3
2.6
6.1
3.8
-0.1
0.5
8.9
3.9
-0.4
-1.6
1.4
1.9
1.6
4.4
3.7
4.3
3.9
4.5
-0.5
0.2
8.8
3.3
2.3

LTC
4.8
1.5
3.7
1.4
3.3
-0.1
6.7
11.5
5.7
1.8
1.5
8.3
1.0
3.2
12.9
1.5
5.7
5.0
3.1
-1.2
1.9
4.9
8.3
2.9
4.5
1.6
3.6
3.2
3.5

S2
5.3
0.9
7.4
-0.2
4.2
1.0
15.0
14.1
11.8
5.6
1.4
8.8
9.9
7.1
12.5
-0.1
7.0
6.9
4.7
3.2
5.5
9.1
12.2
7.4
4.0
1.8
12.4
6.5
5.8

Rebound
Difference from baseline
S2
LTC
IBP
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.1
-0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.1
-0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0

Lost decade
Difference from baseline
S2
LTC
IBP
1.6
0.1
1.7
-0.7
0.0
-0.6
0.0
0.0
0.0
-0.2
0.0
-0.2
1.5
0.1
1.6
-0.4
0.0
-0.3
5.4
0.2
5.6
-0.8
0.0
-0.8
2.9
0.1
3.0
0.9
0.1
1.0
0.4
0.1
0.5
-0.1
-0.1
0.0
0.5
0.1
0.7
0.6
0.1
0.7
0.6
0.0
0.6
0.7
0.2
0.9
4.0
0.1
4.1
0.6
0.5
0.0
1.4
0.0
1.4
-0.2
0.0
-0.1
1.2
0.1
1.3
0.7
0.0
0.8
2.8
0.0
2.9
0.0
0.0
0.0
0.4
0.4
0.0
1.5
0.0
1.5
0.8
0.1
0.9
1.0
0.1
1.1
1.2
0.1
1.2

Permanent shock
Difference from baseline
S2
LTC
IBP
2.5
0.3
2.8
-0.6
0.0
-0.6
-0.1
0.1
0.0
0.1
0.0
0.1
1.3
0.2
1.6
-0.3
0.1
-0.2
5.0
0.4
5.4
0.3
0.3
0.5
3.6
0.2
3.7
1.7
0.3
2.0
0.9
0.4
1.3
0.2
0.1
0.1
0.7
0.2
1.0
0.3
0.1
0.5
0.1
0.0
0.1
0.9
0.4
1.3
4.3
0.2
4.5
0.8
0.7
0.1
2.3
0.2
2.5
0.1
0.1
0.3
1.8
0.3
2.1
0.5
0.1
0.6
2.2
0.1
2.3
-0.1
0.1
0.0
0.8
0.0
0.9
1.7
0.1
1.7
0.6
0.2
0.9
1.3
0.2
1.5
1.6
0.2
1.8

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU-27
EA

Source: Commission services 

For the rebound scenario, the differences with the 
baseline  are  all  in  the  short-term,  and  cancel  each 
other out over the long-term. Conversely, for both 
the  other  scenarios,  the  lasting  impact  of  the 
economic  crisis  puts  more  pressure  on 
the 
sustainability of the public finances. While the lost 
decade  scenario  assumes  a  return  to  previously 
expected  trend  growth,  the  lower  productivity 
growth  for  ten  years  and  the  lower  output  that 
results is forecast to increase the sustainability gap 
as measured by the S2 indicator   of 1.1% of GDP 
to  6.0%  of  GDP  for  EU  27.  This  increase  is 
essentially  driven  by  an  increase  in  the  long-term 
cost of ageing, as an unchanged assumption about 
inflation  and  therefore  the  up-rating  of  pensions 
leads  to higher  spending  as  a  share of  the  (lower) 
GDP.  

In the case of the permanent shock the effect of the 
crisis  on  long-term  sustainability  is  more  marked, 
as  both  the  productivity  and  GDP  growth  are 
assumed to be on a lower trajectory going forward. 
This leads to an ever growing difference in output 
levels  and  an  increase  in  the  sustainability  gap  of 
1.5% of GDP. This is primarily due to higher long 

term  costs  of  ageing,  but  the  initial  budgetary 
position also contributes more to the gap due to the 
lower  GDP  growth.  Although 
the  analysis 
undertaken  in  this  report  is  primarily  a  partial 
equilibrium exercise, in the case of the permanent 
shock  scenario,  a  departure  from  the  permanent 
real interest rate of 3% has been made. Instead, it 
is  assumed  that  the  interest  rate  and  GDP  growth 
rate  differential  remains  constant,  so  that  interest 
rates  in  this  case  are  lower  than  in  the  baseline. 
This  is  because  with  a  permanent  change  in  the 
trend rate of output it would be expected that there 
is additionally an effect on the return to capital and 
therefore the interest rate.  

For  a  few  countries,  the  crisis  scenarios  lead  to  a 
decrease in the sustainability  gaps. This somehow 
counterintuitive  result  is  due  to  eligibility  and  up 
rating  rules  for  pensions,  where  the  lower  accrual 
of pension rights dominates the lower GDP effects 
during the years covered by the analysis. 

53 

 
 
 
2. 

THE EFFECT OF FISCAL CONSOLIDATION: AN MTO 

the  table.  Where  the  actual  MTOs  are  given  as  a 
range, the MTO used and presented in the table is 
from within this range.  For Member States with an 
MTO  of  a  balanced  budget  (such  as  Ireland)  and 
MTO  of  0  is  chosen.  For  the  United  Kingdom, 
which  has  not  submitted  a  formal  MTO  in  its 
convergence programme, an MTO of –1% of GDP 
is used. 

this  path, 

improvement 

The  results  show,  that  overall,  if  fiscal  policy 
the 
the 
followed 
underlying  position  would  be  nearly  sufficient  to 
offset the increase in the long term cost of ageing, 
with an S2 gap of 0.2 % of GDP for EU 27, though 
large  gaps  would  still  exist  for  a  number  of 
Member States. 

in 

This  scenario  shows  that  reaching  the  MTOs 
would  give  a  first  and  decisive  step  towards 
sustainable  public  finances.  However,  it  also 
suggests  that  the  MTOs  of  some  countries  may 
need  to  be  updated.  Moreover,  it  confirms  the 
evidence presented elsewhere in the report that for 
the  many  countries,  in  particular  those  with  the 
largest 
fiscal 
consolidation  efforts  –  if  not  accompanied  by 
structural  reforms  –  will  not  suffice  to  close  the 
sustainability gaps.  

sustainability 

imbalances, 

SCENARIO 

The  impact  of  the  ageing  population  on  the 
sustainability  of  the  public  finances  requires  that 
the sustainability gaps be closed, where they exist. 

In  the  light  of  the  current  financial  and  economic 
crisis, the short-term priority for fiscal policy is to 
find a balance between supporting the recovery of 
the  economies  of  the  Member  States  and  without 
imposing  too  heavy  a  burden  on  the  public 
finances  over  the  long-term.  For  this  reason,  it  is 
not  the  time  to  recommend  immediate  action  to 
address  long-term  sustainability  issues  related  to 
ageing 
in-depth 
understanding  of  the  situations  in  the  various 
countries. 

populations  without 

an 

Table IV.2.1:  Effect of the MTO balance on the S2 indicator and 
required primary balance (RPB) 

Baseline
S2
5.3
0.9
7.4
-0.2
4.2
1.0
15.0
14.1
11.8
5.6
1.4
8.8
9.9
7.1
12.5
-0.1
7.0
6.9
4.7
3.2
5.5
9.1
12.2
7.4
4.0
1.8
12.4
6.5
5.8

MTO scenario
IBP*
-3.7
-9.1
-2.2
-3.4
-3.7
-5.1
-4.5
-3.4
-2.9
-3.2
-3.2
-4.0
-1.3
-4.2
-1.3
-4.7
-4.4
-1.3
-3.0
-3.2
-3.2
-5.8
-3.7
-2.5
-4.4
-4.6
-2.5
-3.2
-3.1

LTC
4.7
2.2
4.2
0.4
3.8
0.1
6.5
11.5
5.7
1.8
1.6
8.3
1.6
3.9
13.4
2.4
5.2
4.7
3.1
0.2
1.9
5.2
8.1
3.6
3.7
2.2
3.6
3.4
3.7

S2
1.0
-6.9
2.0
-3.0
0.0
-5.0
2.0
8.1
2.8
-1.4
-1.7
4.3
0.3
-0.3
12.0
-2.4
0.8
3.4
0.1
-3.1
-1.3
-0.6
4.4
1.1
-0.7
-2.3
1.1
0.2
0.6

Baseline MTO
RPB
5.5
2.6
4.9
1.1
5.1
0.5
7.0
12.4
6.6
2.7
3.2
8.4
2.5
4.6
13.4
3.7
6.0
6.2
4.3
1.4
3.0
5.6
8.4
4.4
4.5
3.2
4.6
4.5
4.8

RPB
5.9
2.3
4.6
2.0
5.1
0.3
7.2
12.7
6.5
2.9
3.4
8.9
2.3
4.1
13.6
3.4
6.2
6.6
4.5
1.1
3.1
5.3
8.4
4.0
5.6
3.2
4.6
4.5
4.9

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU-27
EA

Source: Commission services 

Nevertheless,  over  the  medium  term  a  correction 
of the budgetary positions or reforms to reduce the 
cost  of  ageing  will  be  necessary.  Table  IV.2.1 
presents the effect of the sustainability calculations 
in  terms  of  S2,  assuming  that  the  medium-term 
objectives (MTO) that were in place at the time of 
the  2008/09  round  of  stability  and  convergence 
programmes  of  Member  States  were  met,  through 
a  gradual  improvement  in  the  underlying  fiscal 
position between 2010 and 2015. The MTOs used 
for  the  exercise  are  shown  in  the  final  column  of 

54 

 
 
 
The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

Box IV.2.1: Medium-term debt projections under alternative consolidation scenarios

Rising government deficits and low growth, as well as financial support to the banking sector are leaving a 
legacy  of  fast  growing  government  debt  ratios  in  the  EU.  Reflecting  concerns  arising  from  durably  high 
deficits, this box projects the gross debt-to-GDP ratio of the EU Member States up to next 20 years or so, 
under three stylised scenarios. 

These  projections  are  based  on  the  Commission  services’  spring  2009  forecast  till  2010,  which  are  then 
extended  into  the  future  taking  into  account  the  ‘lost  decade’  macroeconomic  scenario  (see  Chapter  IV, 
section  1.1). Beyond 2020, the scenarios  discussed in  the box assume  a  return of  growth to the long-term 
trend. 

These additional assumptions are also considered:   

•  The  increase  in  age-related  expenditure  is  consistent  with  the  macroeconomic  scenario.  Age-related 
expenditure in the EU increases, on average, by 0.4 p.p. of GDP in the EU as a whole up to 2020 (0.6 p. 
p. in the euro area) and by 1.9 p.p. (2.2 in the euro area) up to 2030;  

•  The  tax-to-GDP  ratios  are  projected  to  converge  to  their  pre-2007  level for  countries  with  2010  tax 
burdens below their 2007 level. For countries with 2010 tax-to-GDP ratio above the pre-crisis level, it is 
assumed that the tax ratio remains constant; 

•  The implicit interest rate on government debt converges to 3% in real terms (the value assumed for the 
purposes  of  the  long-term  sustainability  of  public  finance  assessment)  in  2020  and  remains  constant 
thereafter, for all countries; 

•  Specific stimulus measures projected for 2010 are withdrawn in 2011; 

•  Zero  stock-flow  adjustment;  this  means  no  further  purchases  of  financial  assets  or  recapitalisations  of 

financial institutions, nor disposal of such assets.  

Graph 1 depicts the projected evolution for the government gross debt ratio, for the EU as a whole. The solid 
thick  line  shows  the  outcome  for  this  stylised  scenario  under  the  assumption  of  no  fiscal  consolidation 
measures (Scenario 1). The gross debt-to-GDP ratio would rise steadily over the projection period. By 2015, 
the average debt ratio would be at around 100% of GDP, both in the EU and the euro area. It will continue 
increasing to around 120% of GDP in 2020, though with large differences across countries. 

The highest increases in the debt ratio would take place in Ireland and Latvia. A particularly fast rise in the 
debt  ratio  would  also  occur  under  this  simplified  scenario  for  the  United  Kingdom.  Bulgaria,  Denmark, 
Estonia, Cyprus, Luxembourg, Finland and Sweden would be the only Member States with debt ratios below 
60% of GDP in 2020. 

The graph also shows the results of two further scenarios. In Scenario 2, from 2011 on, all Member States 
would implement fiscal consolidation efforts (measured in terms of structural primary balance) of 0.5% of 
GDP per year until  they reach their medium-term objectives (MTOs). (1) The  graph  clearly illustrates that 
this consolidation rhythm – which is the benchmark consolidation effort in the SGP – would not be enough 
to stabilise, let alone reduce, the debt ratio by 2030. 

(1)  The MTOs of Member States are shown in Table IV.2.1, taking into account information contained in the latest round

of stability and convergence programmes. 

(Continued on the next page) 

55 

 
 
 
                                                           
 
European Commission 

Sustainability Report - 2009 

Box (continued) 

Graph 1: 

Medium-term debt projections under alternative assumptions (% of GDP) 

% of GDP
120

110

100

90

80

70

60

50

Scenario 1
(No consolidation)

Scenario 2
(Consolidation 0.5% of GDP)

Scenario 3
(Consolidation 1% of GDP)

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Source: Commission services. 

A  consolidation  effort  of  1%  of  GDP  per  year  (Scenario  3)  until  the  MTOs  of  each  Member  State  are 
reached would stabilise the government debt ratio in the EU in 2016. Note, however, that by 2030, the debt 
ratio  would  still  be  substantially  larger  than  in  the  pre-crisis  years,  and  5  points  above  the  Maastricht 
reference value.  

Though  these  scenarios  are  based  on  a  number  of  simplifying  assumptions,  they  show  that  a  fast  debt 
reduction requires serious consolidation efforts, sales of assets and may also, in some countries require the 
update on their MTOs to more ambitious levels. Structural measures that contribute to avoid a ‘lost decade’ 
of slow GDP growth would also decisively contribute to an early stabilisation, and then fast reduction, of the 
government debt ratio.  

56 

 
 
 
 
 
 
3. 

SENSITIVITY ANALYSIS NOT LINKED TO THE FINANCIAL 

CRISIS 

The  analysis  presented  in  this  report  is  based  on 
the projections set out in the 2009 Ageing Report. 
This  section  presents  the  changes  in  the  S2 
indicator  under  alternative  assumptions  for  life 
expectancy,  labour  productivity,  participation  in 
the  labour  market,  including  for  older  workers, 
total  employment,  migration  and  the  interest  rate. 
For  all  these  elements  there  is  considerable 
uncertainty  when  predicting  into  the  future,  so 
considering the response of sustainability results to 
the  underlying  assumptions  is  important.  The 
results  are presented  in Table  IV.3.1. It  should be 
noted that the scenarios considered in this analysis 
are  not  necessarily  the  most  realistic  ones,  but 
serve  to  indicate  how  the  results  vary  with  the 
changes in the underlying assumptions. (22)  

the  Eurostat  projections.  Within 

The  higher  life  expectancy  scenario  assumes  an 
increase  in  life  expectancy  of  1  year  by  2060  on 
top  of 
this 
scenario,  mortality  falls  for  all  age  groups,  which 
translates  into  a  slightly  larger  labour  force  and 
slightly  higher  GDP  levels.  Public  expenditure 
increases  as  life  expectancy  improves  over  time, 
thus  usually 
in 
retirement (24)  and  higher  healthcare  expenditure. 
Since  the  impact  of  higher  life  expectancy  on 
public expenditure exceeds the positive impact on 
GDP,  total  age-related  expenditure  to  GDP  tends 
to  increase.  The  S2  indicator  therefore  increases 
with rising life expectancy. Table IV.3.1 shows the 
effect on S2. 

longer  periods 

implying 

in 

this  report 

the  analysis 

As 
is  a  partial 
equilibrium  analysis,  some  of  the  mechanisms  for 
change are not fully taken into account. Thus, the 
sensitivity 
results  may  be  either  under  or 
overestimated  in  case  of  some  scenarios.  The 
results  presented  should  therefore  be  viewed 
within the context of the caveats presented below. 

3.1. 

LIFE EXPECTANCY 

The baseline projections of this report are based on 
the  EUROPOP 2008 
projection 
population 
in  April  2008  by  Eurostat.  The 
published 
projections  are  based  on  assumptions  about 
fertility  and  mortality  rates  and  the  level  of  net 
migration  in  each  Member  State.  Life  expectancy 
at  birth  in  2008  averaged  76.1  years  for  men  and 
for  women (23).  Eurostat  demographers 
82.1 
forecast  to  increase  to  84.6  and  89.1  years 
respectively,  by  2060,  with  a  narrowing  in  the 
range seen between countries. 

(22)  It may be just as plausible that the actual outcome is in the 
opposite direction to the example in the table; for example, 
while  the  analysis  considers  the  effect  of  higher  life 
expectancy, it could be that life expectancy is shorter rather 
than 
the  results  are  not  necessarily 
symmetric, they can serve as an informal ‘ready reckoner’ 
for alternative outcomes. 

longer.  While 

(23)  The range of forecasts is from 65.9 in Lithuania to 79.0 in 
Sweden  for  men  and  76.6  in  Romania  and  84.3  in  France 
for women. 

It  shows  that  a  1  year  increase  in  life  expectancy 
would result in a widening of the S2 sustainability 
gap by 0.5% of GDP across EU-27 and 0.4% in the 
euro area. This is driven by a required increase in 
health-care  and  pension  expenditure  that  an  even 
older population would require.  

The  degree  to  which  an  increased  life  expectancy 
will lead to increased costs depends on the pension 
schemes  and  the  range  of  coverage  of  health  and 
long-term  care.  Member  States  where  the  pension 
annuity  explicitly  depends  on  life  expectancy  at 
retirement  age  (such  as  Italy,  Poland,  Finland  or 
Sweden)  or  where  there  system  is  set-up  to  take 
account  of  fiscal  imbalances  (such  as  through  the 
sustainability  factor  in  Germany)  show  a  smaller 
increase in the gap due to a higher life expectancy. 
Conversely,  Member  States  with  high  levels  of 
pension  expenditure  with  no  such  adjustment 
factors,  such  as  Belgium,  are  expected  to  face  a 
higher increase in costs.  

Increases  in  life-expectancy  also  affect  healthcare 
to  which  healthcare 
expenditure.  The  extent 
expenditure  will  change  depends  in  part  on  the 
particular  healthcare  system  of 
the  different 
Member  States  and  on  whether  the  additional 
year(s)  of  life  are  spent  in  good  health. (25) 
Increases  in  life  expectancy  due  to  improved 

(24)  Note, however, that the pension systems of some Member 
include  clauses  which  automatically  adjust 

States 
retirement ages to changes in longevity. 

(25)  The assumption is that half of the extra year of life will be 

healthy. 

57 

 
                                                           
                                                           
European Commission 

Sustainability Report - 2009 

Table IV.3.1:  Sensitivity scenarios, difference in S2 indicator compared to the baseline scenario 

Baseline

Higher life expectancy

S2
5.3
0.9
7.4
-0.2
4.2
1.0
15.0
14.1
11.8
5.6
1.4
8.8
9.9
7.1
12.5
-0.1
7.0
6.9
4.7
3.2
5.5
9.1
12.2
7.4
4.0
1.8
12.4
6.5
5.8

Total
0.5
0.3
0.5
0.3
0.4
0.4
0.4
0.3
0.4
0.6
0.3
0.4
0.2
0.4
0.6
0.6
0.5
0.2
0.6
0.4
0.7
0.5
0.1
0.4
0.6
0.3
0.7
0.5
0.4

Pension Healthcare

0.2
0.2
0.2
0.1
0.1
0.1
0.2
0.2
0.2
0.3
0.1
0.2
0.0
0.2
0.3
0.2
0.2
0.2
0.3
0.1
0.3
0.2
0.3
0.2
0.1
0.1
0.3
0.2
0.2

0.3
0.2
0.3
0.3
0.3
0.3
0.3
0.2
0.2
0.3
0.2
0.2
0.2
0.2
0.3
0.4
0.4
0.2
0.3
0.4
0.4
0.2
0.3
0.3
0.4
0.3
0.5
0.3
0.3

Long term 
care
0.0
0.0
0.0
-0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.1
-0.2
0.0
0.0
0.0
0.0
-0.5
0.0
0.1
-0.1
0.0
0.0
0.0

Labour 
productivity 
Total
-0.6
-0.2
-0.1
0.0
0.1
-0.1
0.0
-1.3
-0.7
-0.6
-0.4
-0.5
-0.1
0.0
-0.1
-0.2
-0.4
0.0
-0.8
-0.3
-0.5
0.0
-0.3
-0.1
-0.3
-0.1
0.0
-0.3
-0.4

Older 
workers 
Total
-0.4
0.0
0.5
-0.2
-0.1
0.0
-0.2
-0.4
-0.2
-0.5
-0.1
-0.1
-0.1
-0.2
-0.2
-0.2
-0.2
-0.2
-0.5
-0.1
-0.2
-0.3
-0.5
-0.1
-0.2
-0.2
-0.1
-0.2
-0.3

Total 
Employment 
Total
-0.5
-0.2
0.5
-0.4
-0.2
0.0
0.1
0.1
-0.4
-0.5
-0.1
0.6
-0.1
0.2
-0.2
-0.1
0.5
-0.4
-0.5
0.0
-0.4
0.5
-0.2
0.3
-0.3
-0.3
0.0
-0.3
-0.3

Zero 
migration 
Total
2.9
0.3
1.1
1.2
1.9
0.3
1.8
2.2
2.6
1.4
3.4
4.7
0.2
-0.1
6.8
1.4
1.8
1.1
4.4
0.5
3.0
0.3
1.0
0.4
0.9
1.5
3.1
2.2
2.3

Total
0.2
-0.3
-0.6
0.3
0.1
0.1
-0.7
:
-0.7
:
:
:
:
-0.4
-2.4
0.2
-0.5
-0.3
:
0.4
0.3
-0.7
:
-0.4
-0.2
-0.1
-0.1
:
:

Interest rate

IBP
0.9
0.1
0.3
0.1
0.7
0.1
0.6
:
0.4
:
:
:
:
0.2
0.0
0.7
0.6
0.4
:
0.4
0.7
0.2
:
0.2
0.2
0.3
0.6
:
:

LTC
-0.7
-0.5
-0.9
0.1
-0.6
0.0
-1.4
:
-1.1
:
:
:
:
-0.7
-2.5
-0.5
-1.1
-0.7
:
0.0
-0.4
-0.9
:
-0.6
-0.4
-0.4
-0.7
:
:

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

Source: Commission services 

health are likely to be less costly to the healthcare 
budget than increases primarily due to advances in 
medical technology.   

3.2. 

LABOUR PRODUCTIVITY 

for  GDP 

A  difference  in  labour  productivity  to  that  set  out 
in  the  baseline  scenario  leads  to  a  different 
trajectory 
growth.  Age-related 
the 
expenditures  are  also  affected,  although 
indexation rules in place will determine the size of 
the effect. In particular, if pension, health care and 
long-term  care  expenditure  are  closely  related  to 
productivity growth, for example by being indexed 
to wages, the time patterns of GDP and age-related 
expenditure  are  similar.  On  the  contrary,  if  the 
indexation rules do not reflect the developments in 
productivity the two variables diverge. 

In  the  baseline  scenario,  labour  productivity  is 
assumed  to  increase  at  an  average  annual  rate  of 
1.8%, with higher rates in the earlier period for the 
new  Member  States,  given  their  relative  stages  of 
development. 
scenario 
considered  in  this  section,  the  labour  productivity 
growth  rate  is  0.25  percentage  points  higher  than 
in the baseline. The increase in labour productivity 
is  assumed  to  occur  linearly  between  2010  and 
2020 and to remain at the higher level thereafter. 

alternative 

the 

In 

The results in Table IV.3.1 show the effect of the 
higher  labour  productivity  scenario  on  the  S2 
indicator. As age-related expenditure in percent of 
GDP  falls  with  growing  labour  productivity  in 
most of the EU Member States, the overall impact 
on S2 indicator is positive, i.e. S2 falls. The results 
indicate  that  such  an  increase  in  productivity 
would  reduce  the  sustainability  gap  by  0.3%  of 
GDP  on  average  for  EU-27,  and  by  0.4%  in  the 
Euro area.  

this  scenario, 

When  considering 
the  partial 
equilibrium  approach  used  should  be  borne  in 
mind. In line with this approach, the analysis does 
not  capture  any  increase  in  the  government 
revenue-to-GDP  ratio.  In  other  words,  the  no-
policy  assumption  is  implemented  in  such  a 
manner that the faster GDP growth does not imply 
fiscal drag.. 

3.3. 

EMPLOYMENT RATE 

that 

baseline 

assumes 

scenario 

The 
the 
employment  rate  of  the  working  age  population 
overall,  and  of  older  workers 
in  particular, 
increases  over  the  medium  term  from  70.4%  of 
individuals aged 15-64 in 2007 to around 74% for 
EU-27 in 2060. Most of this increase is assumed to 
come  from  older  workers;  those  aged  55-64  are 

58 

 
 
 
The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

assumed  to  see  a  rise  in  participation from  47.5% 
to around 62½% between 2007 and 2060. 

The higher total employment scenario is based on 
the  assumption  of  a  further  increase  in  the 
employment rate of 1 percentage point, relative to 
the  baseline  projection.  It  assumes 
this 
increase  occurs  linearly  between  2010  and  2020 
and  that  employment  remains  higher  from  there 
on.  The  increase  in  employment  is  assumed  to 
occur through a lowering of the NAIRU.  

that 

though 

The  other  employment  scenario  assumes  an 
increase in the employment rate of older workers, 
equal to 5 percentage points relative to the baseline 
scenario, 
the  retirement  age  remains 
unchanged as compared to the baseline. Again, the 
increase is assumed to occur linearly between 2010 
and  2020  and  remain  higher  thereafter.  The 
increase occurs through a reduction in the inactive 
population.  

In  the  first  instance,  higher  labour  force  increases 
GDP  growth  compared  to  the  baseline  However, 
an  increase  in  the  employment  of  older  workers 
also has an impact on pension expenditure. Insofar 
as  individuals  postpone  their  exit  from  the  labour 
market,  pension  expenditure  decreases,  due  to 
individuals  working  rather  than  claiming  pension 
benefits. However, as individuals work longer they 
accumulate  more  rights  and  subsequently  receive 
higher  pensions  once  they  retire.  Thus,  the  effect 
of  higher  employment  changes  over  time  and  is 
spread over a long horizon. Indeed, the exact effect 
will  depend  on  the  pension  system  (including 
penalties  or  encouragement  for  earlier  retirement) 
the  coverage  and  the  ageing  structure  of  each 
Member State. 

In general, a further increase in participation rates, 
either  overall  or  specifically  for  older  workers 
would reduce the sustainability gap in many of the 
Member States. Table IV.3.1 sets out the effect on 
the  S2  sustainability  gap.  An  increase  in  the 
employment  rate  of  older  workers  will  reduce  the 
EU  27  sustainability  gap  by  0.2%  of  GDP,  while 
an increase in total employment by 0.3%. In some 
Member  States,  though,  the  effect  of  higher 
pension entitlements which are accrued during the 
extra  years  of  work  overrides  the  GDP  effect  of 
more workers and is therefore costly to the public 
finances.   

in 

increase 

the  case  of 

As 
labour 
the 
productivity  scenario,  any  increase  in  government 
revenues  as  a  share  of  GDP,  due  to  higher 
employment,  faster  growth  and  fiscal  drag  is  not 
captured.  

in 

3.4.  MIGRATION 

The baseline scenario assumes that the average net 
annual  migration  rate  falls  from  0.3%  of  the 
population  in  2008  and  0.2%  in  2060 for  EU  27. 
Overall,  an  additional  59  million  migrants  are 
projected  to  join  the  Union  between  2007  and 
2060,  with  most  joining  the  euro  area.  Countries 
that  have  recently  experiences  net  outflows  of 
migration  (Estonia,  Lithuania,  Latvia,  Poland, 
Bulgaria  and  Romania)  are  assumed  to  see  a 
tapering off or reversal of the situation. 

Migration is of course very difficult to predict as it 
depends on socioeconomic and political, legal and 
social developments in both the EU and the rest of 
the  world,  in  particular  in  the  neighbouring 
countries. 

Migrants  are  an  important  addition  to  the  work 
force as they tend to be of working age. Moreover, 
there  is  a  longer-term  effect  on  population  since 
immigrant populations usually have higher fertility 
rate.  Therefore,  in  the  short  and  medium-run,  an 
inflow  of  migrants  leads  to  increase  in  GDP  of 
receiving  country.  However,  as  working  migrants 
accumulate pension rights, over the long-term they 
too receive pensions and other social benefits paid 
the host country. 

the  effects 

that  zero 
Table  IV.3.1  presents 
migration between each EU Member State and the 
rest of the world would have on the sustainability 
gap. This scenario should not be taken as a realistic 
prediction of possible outcomes for the future. It is 
included  to  provide  a  bound  for  the  effect  of 
reduced  migration  by  showing 
the  overall 
contribution that migrants are assumed to make to 
the  growth  rates  of  the  EU  economies  and  fiscal 
sustainability. Overall, assuming zero migration in 
the EU as a whole and in each Member States from 
now  until  2060  would  increase  the  sustainability 
gap by 2.2% of GDP in EU 27, with considerable 
variation between countries. 

59 

 
 
European Commission 

Sustainability Report - 2009 

Box IV.3.1: Scenario on postponing retirement

This box presents a scenario where effective retirement ages of all Member States are increased in a uniform 
manner.  The  aim  is  to  illustrate  the  impact  of  reforms  aimed  at  increasing  the  retirement  age  on 
sustainability of public finances. 

Labour market exit ages vary however significantly between countries, which are thus in differing positions 
to  address  their  sustainability  challenges  through  reforms  that  would  defer  retirement.  The  effective  exit 
ages  in  2008  are  reported  in  Graph  1:  Luxembourg  and  Slovenia  have  the  lowest  exist  ages,  while  the 
highest exist ages are in Sweden and Ireland. 

Graph 1: 

Effective exit ages in 2008 

e
g
a

t
i

x
E

65

64

63

62

61

60

59

58

57

LU SI

AT BEMT

FRBG IT PLHUSK EA ELEUCZ FI

NLESDEDKUK

ROLTLV EE PT

CY IESE

Source: Ageing Report 2009. 

In  the  absence  of  policy  measures  aimed  at  postponing  retirement  ages  –  like  a  change  in  the  statutory 
retirement ages or other encouragements for older workers to remain in the labour market – there will be a 
very slow increase in the exit ages (see Graph 2, baseline). This increase is related to the fact that different 
age cohorts have different participation rates. The average exit age for the EU-27 aggregate would increase 
from  slightly  below  62  in  2008  to  just  above  63  years  in  2060.  It  should  be  noted  that,  according  to  the 
demographic projections, the remaining life expectancy at 62 is expected to increase from 20.2 years in 2008 
to 26.2 in 2060. 

The scenario is based on the assumption that exit ages for each Member State increase by two years – on top 
of the baseline – from 2010 to 2020 in a linear fashion. After 2020, the exit ages keep rising by two-thirds of 
the increase in remaining life expectancy. Graph 2 shows the trajectories of average exit ages in the baseline 
scenario  and  the  postponed  retirement  scenario  for  the  EU  as  a  whole.  The  projected  evolution  in  the 
remaining life expectancy at 62 is also shown. 

The scenario is purely illustrative; it is not realistic to assume that the retirement ages will increase the same 
in all countries. One may expect the retirement ages to converge, that is, one may expect retirement ages to   
(Continued on the next page) 

60 

 
 
 
 
The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

Box (continued) 

 increase  more  in  the  countries  that  currently  have  the  lows  retirement  ages,  and  by  relatively  less  in  the 
countries with the relatively high exit ages. 

Graph 2: 

Exit ages (EU27, baseline and postponed retirement scenario) 

Exit age: postponed 
retirement scenario

Exit age: baseline

Remaining life expectancy at 62 (rhs)

70

68

66

64

62

60

58

56

54

52

50

35

33

31

29

27

25

23

21

19

17

15

2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056 2060

Year

Source: Commission services. 

These additional assumptions are also considered n this scenario: 

• 

• 

• 

The  extension  of  working  lives  increases  total  labour  supply  in  a  proportional  manner.  Labour 
productivity  for those older workers  who continue to stay in the labour force due the deferral of 
the exit age is assumed to be 90 percent of the productivity of an average worker; 

Total pension expenditure is reduced in proportion to the decrease of average years in retirement, 
which  is  proxied  by  the  remaining  life  expectancy  at  the  average  exit  age.  Compared  with  the 
baseline, the average pension increases in line with GDP; 

The  ratio-to-GDP  of  other  age-related  expenditure  (health  care,  long-term  care,  education  and 
unemployment benefits) evolves according to the baseline scenario. 

The  main  implications  of  the  increase  in  exit  ages  are  related  to  increase  in  labour  supply  and  the  cut  in 
overall  pension  expenditure  as  compared  with  the  baseline.  Given  the  increase  in  labour  supply,  GDP 
growth rises on average 0.14 percent per year: by 2060 the GDP level is around 7½ percent larger than in the 
baseline.  The  ratio  to GDP of pension expenditure  in  the  EU as a  whole  falls by 1.8  percentage  points  of 
GDP; the average pension increases in line with GDP, but the number of pensions paid is lower than in the 
baseline. 

The postponed retirement scenario yields a sustainability gap (S2) for EU-27 of 4.8 percent of GDP, which 
is 1.7 points lower than in the baseline scenario. Therefore, a substantial gap would remain. 

The intuition behind these results is as follows: postponing exit ages, as described, practically eliminates the 
increase in pension expenditure as a share of GDP, though there is an increase in the average pension.  Note,   
(Continued on the next page) 

61 

 
European Commission 

Sustainability Report - 2009 

Box (continued) 

 however,  that  the  projected  increase  in  pension  expenditure  in  the  baseline  scenario  is  only  half  of  the 
overall  long-term  increase  in  age-related  expenditure  (healthcare  spending  and  long-term  care  remain 
unchanged).  Moreover,  for  EU-27,  LTC  (the  required  adjustment  given  the  long-term  change  in 
expenditure)  is  around  half  of  S2  in  the  baseline  scenario.  Therefore,  the  reduction  in  the  sustainability 
imbalance is around one-fourth of S2 in the baseline scenario. 

Aside  from  the  plausibility  of  the  scenario,  the 
results  for  certain  Member  States  need  to  be 
considered  within  the  context  of  their  economies. 
For Luxembourg and Cyprus, the baseline scenario 
is  for  net  migration  between  2008  and  2060  to 
contribute to an increase of around 40 and 50% of 
their  2007  populations.    Both  these  countries' 
economies  are  heavily  reliant  of  migrant  workers 
at  the  moment,  and  despite  the  strong  increase  in 
population  in  the  baseline  assumptions,  it  still 
corresponds to a marked decrease in the rate of net 
migration.  When  interpreting  the  results  of  the 
sensitivity analysis, however, it should be borne in 
mind  that  the  zero  migration  scenario  is  a  large 
departure  from  the  baseline  for  these  (and  a 
number  of  other)  countries,  so  the  magnitude  of 
these results should be interpreted carefully.  

3.5. 

INTEREST RATE 

The  alternative  scenario  considered 
in  Table 
IV.3.1.  assumes  a  real  interest  rate  of  4%,  rather 
than the 3% assumed in the baseline.  

The  effect  of  this  change  in  the  interest  rate 
assumption  is  to  reduce  the  LTC  component  but 
increase the IBP component. A higher interest rate 
reduces  the  amount  that  a  country  has  to  save  to 
pay  for  an  ageing  population  in  the  future,  but 
increases  the  amount  required  to  service  existing 
debt. (26)  

For Member States with ageing profiles where the 
costs  are  set  to  increase  further  rather  than  earlier 
in the future, a higher interest rate allows them to 
finance  these costs  through smaller  increases  now 
compared  with  the  baseline.  Countries  such  as 
Ireland,  Spain,  Luxembourg  and  Malta,  with  a 

(26)  It  can  be  seen  that  the  effect  of  changing  the  interest  rate 
assumption  has  a  larger  effect  on  countries  with  higher 
starting levels of debt, such as Greece and Italy. 

62 

large  increase  in  public  expenditure  over  the 
medium term, therefore benefit from a higher real 
interest rate.  

In interpreting all these results, it should be borne 
in mind that the effect of a higher interest rate on 
the  growth  rate  of  the  economy  has  not  been 
modelled. The implicit assumption is that a higher 
interest  rate  is  consistent  with  unchanged  GDP 
growth rates. 

3.6.  ALTERNATIVE HEALTH CARE SCENARIOS 

the 

shows 

IV.3.2 

impact  on 

long-term  care  spending, 

Table 
the 
sustainability gap of a faster increase in healthcare 
and 
irrespective  of 
demographic  and  macroeconomic  assumptions. 
The  data  shows  that  several  variables  drive  the 
evolution in healthcare expenditure. 

is  an 

Healthcare  spending  tends  to  increase  with  GDP 
growth  and 
important  component  of 
government  spending.  Moreover,  its  response  to 
increased longevity is more difficult to predict that 
pension  spending  because  it  crucially  depends  on 
both on the health status of the population and, in 
many Member States, on demand factors. It is also 
difficult  to  predict  the  effect  that  technology  will 
have  on  the  demand  for  government  spending  in 
this area. 

The  baseline  scenario  assumes  that  half  the 
additional  years  of  life  from  the  increase  in  life 
expectancy  are  healthy,  whereas  half  entail 
additional costs associated with age and morbidity.  

The  ‘pure  ageing’  scenario  assumes  that  the  age-
related  morbidity  rates  do  not  improve  and  all 
gains in life expectancy are assumed to be spent in 
bad health. This attempts to isolate the pure effect 
of  an  ageing  population  on  health-care  spending, 
but in doing so ignores the fact that people might, 

 
                                                           
 
 
The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

Table IV.3.2:  Sensitivity scenarios, difference in S2 indicator compared to the baseline scenario 

Pure Ageing

Constant Health 
Status

Death-related 
Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour Intensity

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

0.2
0.0
0.1
0.2
0.1
0.0
0.2
0.0
0.1
0.1
0.1
0.2
0.0
0.1
0.1
0.3
0.3
0.1
0.1
0.2
0.2
0.0
0.0
0.0
0.3
0.1
0.2
0.1
0.1

-0.7
-0.5
-0.7
-0.5
-0.6
-0.6
-0.6
-0.5
-0.5
-0.6
-0.4
-0.4
-0.4
-0.5
-0.6
-0.7
-0.7
-0.4
-0.6
-0.9
-0.7
-0.5
-0.6
-0.7
-0.5
-0.5
-0.7
-0.6
-0.5

0.1
0.0
0.0
0.1
-0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.1
-0.4
0.0
0.0
0.2
0.0
0.0
-0.1
-0.1
0.2
0.1
-0.4
-0.1
0.0

0.4
0.3
0.4
0.4
0.4
0.3
0.4
0.3
0.3
0.4
0.3
0.3
0.2
0.3
0.4
0.6
0.6
0.3
0.4
0.5
0.5
0.3
0.4
0.4
0.5
0.3
0.5
0.4
0.4

:
1.9
0.4
:
:
1.3
:
:
:
:
:
3.1
2.5
1.6
:
1.1
1.3
:
:
2.1
:
2.1
0.4
1.0
:
:
:
:
:

0.7
0.6
1.1
0.6
0.6
0.8
0.8
0.7
0.6
0.7
0.5
0.5
0.7
0.7
0.1
0.9
0.9
0.7
0.8
0.9
0.8
0.7
1.4
0.6
0.8
0.7
0.6
0.7
0.6

Source: Commission services 

in part, be living longer because they are healthier. 
Such  a  scenario  would  increase  the  EU  27 
sustainability gap by 0.1% of GDP. 

Conversely, the ‘constant health’ scenario assumes 
that  the  number  of  years  spent  in  bad  health  are 
constant  with  all  gains  longevity  from  now  on 
being  healthy  ageing.  Such  a  scenario  would 
reduce  the  sustainability  gap  by  0.6%  of  GDP  in 
the  EU-27  countries.  This  is  a  much  bigger 
absolute effect than in the opposite case (the pure 
demographic  scenario)  because  health-care  costs 
increase  disproportionately  with  age  and  this 
scenario  looks  at  changing  the  assumptions  made 
about the oldest old.  

This  scenario  has  been  constructed  by  looking  at 
the  different  costs  for  descendents  and  survivors 
provided  by  Member  States  and  applies  them  to 
the  EUROPOP2008  demographic  projections.  It 
shows a small fall in the sustainability gap overall, 
but some variation across countries. 

The  ‘income  elasticity’  scenario  departs  from  the 
baseline assumption of a constant income elasticity 
of demand for healthcare of 1. Instead, it assumes 
an elasticity of 1.1 which converges to 1 by 2060, 
reflecting  a  higher  demand  for  healthcare  as 
society becomes wealthier. It shows an increase of 
the sustainability gap of 0.4% of GDP for the EU 
27 countries.  

Spending  on  healthcare 
is  concentrated  on 
individuals'  final  years.  The  ‘death-related  costs’ 
scenario  projects  healthcare  spending  by  linking 
health-care spending to the remaining years of life. 

So  far,  all  the  scenarios  presented  approach  the 
costs  of  healthcare  as  being  demand  rather  than 
supply  driven.  The  final  two  scenarios  do  the 
opposite.  The  ‘EU12  cost  convergence’  scenario 

63 

 
 
 
Member  States  which  currently  offer  little  long 
term  care  assistance  will  continue  to  do  so  in  the 
future.  In  the  light  of  an  ageing  population  this 
may not be realistic and, moreover, may have other 
adverse consequences on the relatives of the old.  

The first scenario looks at the increase in S2 from 
a  shift  away  from  informal  care  to  home-based 
care. It models the impact of a yearly shift of 1% 
of  the  disabled  elderly  who  receive  only  informal 
care  receiving  formal  care  at  home,  over  the  first 
10  years  of  the  forecasting  period.  Such  a  shift 
would increase the gap by an average of 0.2 % of 
GDP. A shift to institutional care, however, would 
be  more  expensive  with  a  corresponding  increase 
in S2 of 0.5% of GDP. 

the 

results 

Finally,  the  last  two  scenarios  look  at  the  supply 
side  and  present 
for  different 
assumptions  about  the  growth  in  the  costs  of 
fast/slow  unit  growth 
providing  care.  The 
scenarios show the effect of increasing or reducing 
the assumed rate of growth of unit costs which are 
supposed to evolve in line with GDP per worker in 
the baseline scenario. The effect is to increase the 
sustainability  gap  by  an  average  of  0.3%  of  GDP 
for the fast growth or reduce it by 0.8% in the slow 
growth scenario.  

European Commission 

Sustainability Report - 2009 

assumes  that  the  costs  of  delivering  healthcare  in 
the  most  recently  acceded  Member  States  (EU12) 
increase  to  the  average  observed  in  the  EU15 
countries by 2060, thus increasing significantly the 
cost  of  ageing  in  the  new  Member  States.  As 
healthcare  spending  in  EU  is  significantly  below 
spending  in  the  rest  of  the  EU,  if  this  scenario 
those 
materialised, 
countries would widen quite substantially. 

the  sustainability  gap 

in 

Finally,  the  ‘labour  intensity’  scenario  assumes 
that  healthcare  costs  are  driven  by  productivity 
increases,  as  healthcare  is  a  relatively  labour 
intensive  sector.  This  scenario  serves  to  provide 
and  insight  into  the  effects  of  unit  costs  on 
healthcare  expenditure.  It  assumes 
that  costs 
increase  with  GDP  per  worker  rather  than  per 
capita  and  shows  an  overall  increase  in  the 
sustainability gap of 0.7% of GDP for EU 27. 

3.7.  CHANGES IN THE LONG-TERM CARE 

ASSUMPTIONS 

The  final  section  of  this  chapter  considers  the 
effect  on  the  sustainability  gap  of  changing  the 
underlying  assumptions  on  the  costs  associated 
with long-term care. The results are shown in table 
IV.3.3. 

The  first  two  columns  show  the  effect  on  S2  of  a 
pure  demographic  change,  where,  just  as  in  the 
healthcare scenario, it is assumed that there is not 
improvement in the rate of disability and ability of 
individuals 
life 
for 
expectancy  increases.  This  would  increase  the 
sustainability gap by an average of 0.1 percentage 
points (p.p.) of GDP. The overall effect on the gap 
though  would  the  sum  of  this  and  the  effect  on 
healthcare presented in the previous section. 

themselves  as 

to  care 

the  constant  disability 

scenario 
Conversely, 
assumes that trends in age-specific disability rates 
decline in the future – it is therefore analogous to 
the  constant  health  states  assumption  in  the 
healthcare  scenarios.  It  assumes  that  the  level  of 
disability  in  the  Member  States  stays  constant 
despite  the  increase  in  older  people.  This  would 
lead to a decrease in the contribution of long term 
care  to  the  S2  indicator  by  an  average  0.1  %  of 
GDP. The next two scenarios show the impact on 
S2 of a change in care arrangements. The baseline 
scenario  assumes  no  policy  change,  meaning  that 

64 

 
The potential impact of the current economic crisis and sensitivity analysis 

Chapter IV 

Table IV.3.3:  Sensitivity scenarios, difference in S2 indicator compared to the baseline scenario 

Shift to formal care

Pure Ageing

Constant 
Disability

At home

In an 
institution

Fast growth in 
unit costs

Slow growth in 
unit costs

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EU27
EA

0.1
0.0
0.0
0.2
0.1
0.0
0.1
0.1
0.0
0.1
0.1
0.0
0.0
0.0
0.1
0.0
0.1
0.3
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.2
0.0
0.1
0.1

Source: Commission services 

-0.1
0.0
0.0
-0.2
-0.1
0.0
-0.1
-0.1
0.0
-0.1
-0.1
0.0
0.0
0.0
-0.1
0.0
-0.1
-0.3
-0.1
0.0
0.0
0.0
0.0
0.0
-0.1
-0.2
0.0
-0.1
-0.1

0.3
0.1
0.0
0.4
0.2
0.0
0.2
0.3
0.1
0.1
0.4
0.0
0.1
0.1
0.3
0.1
0.1
0.5
0.2
0.2
0.0
0.0
0.2
0.1
0.2
0.4
0.1
0.2
0.2

0.6
0.1
0.1
0.2
0.4
0.1
0.4
0.6
1.3
0.4
0.8
0.0
0.6
0.2
0.7
0.3
0.5
1.1
0.1
0.0
0.1
0.0
0.4
0.0
0.9
0.8
0.1
0.5
0.6

0.3
0.0
0.1
0.4
0.2
0.0
0.2
0.4
0.1
0.2
0.3
0.0
0.1
0.1
0.4
0.1
0.3
0.9
0.3
0.1
0.0
0.0
0.2
0.0
0.4
0.6
0.1
0.3
0.3

-1.0
-0.1
-0.3
-1.2
-0.9
-0.1
-1.0
-1.4
-0.5
-0.6
-0.8
0.0
-0.3
-0.3
-1.6
-0.2
-1.0
-3.3
-0.8
-0.4
-0.1
0.0
-1.1
-0.2
-1.9
-1.7
-0.4
-0.8
-0.9

65 

 
 
 
 
 
Chapter V 
Other factors 

 
 
SUMMARY 

this 

III  of 

report  presented 

Chapter 
the 
sustainability  indicators  and  chapter  IV  discussed 
and quantified some of the uncertainty surrounding 
them.  This  chapter  expands  on  the  discussion  of 
the uncertainty by looking at aspects that cannot be 
quantified as readily, but are nonetheless important 
in assessing the overall sustainability of a country's 
public finances.  

The  level  of  debt  of  an  economy  enters  the 
sustainability 
indicators  directly  and  affects 
sustainability through the need to service the debt. 
However,  beyond  this  direct  effect,  the  level  of 
debt  can  have  further  consequences  on  both  the 
real and political side of the economy. A high level 
of debt can reduce a country's ability to deal with 
even  a  temporary  shock  to  its  interest  rate  or 
growth  rate.  With  the  costs  of  servicing  the  debt 
being more significant the higher the level of debt, 
a shock to the cost of servicing has the potential to 
be  markedly  more  significant  than  for  countries 
with a lower stock of debt to re-finance. Moreover, 
a high level of debt can also affect the interest rate 
paid on it with threshold effects being a possibility. 
These  occur  when  debt  reaches  a  certain  level 
beyond  which  interest  rates  are  pushed  up.  The 
levels  of  debt  in  the  EU  Member  States  are 
therefore  considered  as  an  additional  risk  factor 
the 
over  and  above 
sustainability gaps.  

their  contribution 

to 

States' 

pension 

The  chapter  also  considers  the  possibility  that  the 
assumptions about pension expenditure underlying 
the  Member 
expenditure 
projections may be difficult to implement socially 
and politically. While pension reform is important 
for  many  countries,  it  is  also  important  that  the 
expected  levels  of  average  pension  are  realistic. 
Countries  forecasting  a  strong  fall  in  the  relative 
generosity of their pensions may find that they are 
unable  to  deliver  this  for  political,  electoral  and 
social reasons. For this reason, such countries may 
face  a  higher  sustainability  challenge  than  is 
apparent by looking just at the indicators, although 
the  extent  to  which  this  occurs  will  depend  on 
private  pension  provision  and  whether  individuals 
anticipate the decline in the state pension and make 
alternative arrangements for the retirement. 

Moreover,  private  pensions  themselves  are  not 
without  risk.  Insofar  as  they  depend  on  the 
vagaries  of  financial  markets  a  shortfall  in  their 
the 
performance  can 

in  pressure  on 

result 

in 

that 

is  not 

included 

government to address shortfalls. Indeed, there is a 
wide  range  of  expenditure  that  governments  may 
be  faced  with 
the 
projections.  Contingent  liabilities  are  those  which 
the government only needs to assume if particular 
situations  arise.  These  may  be  implicit  –  such  as 
dealing with natural disasters – or explicit, such as 
loan  guarantees.  In  the  light  of  the  economic  and 
financial  crisis,  many  Member  States  have  taken 
on  explicit  contingent 
the 
functioning  of  the  financial  sector  and  other 
industries. Depending on whether or not these are 
called in, the public finances of the Member States 
may find themselves with additional spending that 
is currently not being budgeted for. 

liabilities 

to  aid 

A  final  factor  that  is  considered  is  the  apparent 
scope which Member States' governments have to 
address  the  sustainability  problems  illustrated  in 
this  report.  In  theory,  a  sustainability  gap  can  be 
filled  by  increasing  tax  revenues  or  reducing 
spending,  while  in  the  short-term  an  increase  in 
debt is a possibility for countries with low levels of 
debt  and  a  back  loaded  ageing  profile.  Reducing 
spending  means  either  reducing  spending  on  non-
age-related  expenditure  or  reforming  the  social 
security  system  so  that  the costs of  ageing  can be 
contained.  For  countries  with  current  very  high 
levels of tax or low levels of spending the options 
may  be  more  limited  as  it  may  be  difficult  and 
economically  costly  for  them  to  increase  tax 
further. 

69 

 
   
 
1.  DEBT AND ASSETS 

indicators  and  chapter 

Chapter III of this report presented the estimates of 
the  sustainability 
IV 
discussed  and  quantified  some  of  the  uncertainty 
surrounding  them.  This  chapter  expands  on  the 
discussion of the uncertainty by looking at aspects 
that  cannot  be  integrated  in  the  sustainability 
indicators,  or  quantified,  as  readily,  but  are 
nonetheless  important  in  assessing  the  overall 
sustainability  of  a  country's  public  finances.  The 
issues  discussed  in  this  chapter  will  be  taken  into 
account  in  the  overall  assessments  presented  in 
chapter  VI  and,  on  a  country  by  country  basis, 
chapter VII. 

1.1. 

THE LEVEL AND EVOLUTION OF GROSS 
DEBT 

The  current  level  of  government  debt  directly 
affects  sustainability  through  the  need  to  service 
the interest payments on the debt. It enters S1 and 
S2  through  the  term  that  relates  to  the  initial 
budgetary  position  (IBP) (27).  It  also  enters  S1  in 
the  debt  requirement  (DR)  term  which  measures 
additional  effort  to  the  debt  stabilisation  for 
Member  States  with  debt  initially  above  60%  of 
GDP to reach that level in 2060.   

Beyond  this  direct  effect,  the  level  of  debt  can 
have further consequences on the economy and on 
policy  making.  A  high  level  of  debt  can  reduce  a 
country's  ability  to  deal  with  shocks  to  interest 
rates or growth rates, even if those are temporary. 
With  the  costs  of  servicing  the  debt  being  more 
significant the higher the level of debt, a shock to 

(27)  The definition of debt used in this report is the one relevant 
for  the  EU  budgetary  surveillance  procedures.  It  has  been 
established by the Treaty Protocol on the excessive deficit 
procedure  and  specified  in  Council  Regulation  (EC)  No 
479/2009 (which has recently codified Regulation (EC) No 
3605/93  and  a  number  of  amending  acts)  through  cross 
references to the European System of Accounts (ESA95). It 
is gross debt for all government, consolidated at face value. 
It  includes  loans,  deposits  and  bonds,  in  national  and 
foreign  currencies.  The  debts  of  public  enterprises,  which 
are classified by statisticians in the corporate sector, are not 
included,  even  if  some  governments  take  over  public 
enterprises’ debts from time to time. Spending in arrears is 
not  included  either.  Contingent  liabilities  (which  are 
discussed  later  in  this  chapter)  and  the  debts  of  special 
purpose  vehicles  active  in  the  management  of  the  current 
crisis  are  not  included.  It  also  does  not  include  the  net 
present value of the accrued-to-date pensions to be paid to 
civil servants or beneficiaries of social security. 

70 

the  cost  of  servicing  has  the  potential  to  be 
markedly  more  significant  than  for  countries  with 
a lower stock of debt to re-finance. For example, in 
countries  where  government  debt  exceeds  annual 
GDP,  a  relatively  small  rise  of  10  basis  points  in 
financing  costs  increase  government  outlays  by 
more than 0.1% of GDP per year. 

A  high  level  of  debt  is  likely  to  lead  to  threshold 
effects, whereby once debt reaches a certain level, 
further  increases  to  debt  will  push  interest  rates 
higher.    This  increase  occurs  in  order  to  continue 
to  attract  buyers  of  government  debt,  and  may 
have the effect of crowding out private investment. 
The level of debt at which it happens will vary by 
country and depend on characteristics such as size, 
economic  development,  the  structure  of  financial 
market, debt maturity, external imbalances and the 
monetary regime. 

signal 

financial  markets 

The effect of increasing debt servicing costs and a 
consequent  increase  in  interest  rates  faced  by 
governments  issuing  (and/or  re-financing)  debt, 
can also play a disciplinary role. In particular, once 
the 
a  decreased 
willingness  to  take  on  a  government’s  debt  by 
requiring  higher  interest  rates  in  return,  this  can 
exert  pressure  on  governments  to  contain  their 
fiscal deficits. By setting out credible plans to stop 
and  reverse  the  increase  in  their  debt  levels, 
governments  can  try  to  reduce  the  perceived 
sovereign  risk.  Once  debt  reaches  a  certain  high 
level,  such  actions  may  become  necessary  to 
contain  the  snowball  effect  of  government  debt 
and  ensure  the  continued  sustainability  of  a 
country's economy.  

Table  V.1.1  shows  the  government  debt-to-GDP 
ratios for the EU Member States for 2000, 2005 to 
2008, as well as forecasts for 2009 and 2010 on the 
Commission  2009  Spring  forecasts.  The  forecast 
change  in  ratio  between  2009  and  2010  is  also 
shown. The figures show a marked increase in debt 
between 2009 and 2010 – primarily as result of the 
ongoing economic and financial crisis. At the end 
of  2008  Italy  had  a  government  gross  debt  that 
exceeded  100%  of  annual  GDP,  while  Greece's 
debt  was  close  to  that  threshold  and  Belgium's 
stood  at  nearly  90%  of  GDP.  By  2010,  the 
forecasts show both Greece and Belgium returning 
to above the 100% threshold. 

 
                                                           
Chapter V 

Other factors 

Table V.1.1:  General government gross debt ratio 

Debt as a % of GDP, outturn and forecast

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EA-16
EU-27

2000
107.8
74.3
18.5
51.7
59.7
5.2
37.7
101.8
59.2
57.3
109.2
58.8
12.3
23.7
6.4
54.2
55.9
53.8
66.4
36.8
50.4
24.6
26.8
50.3
43.8
53.6
41.0
69.2
61.8

2005
92.2
29.2
29.8
37.1
67.8
4.5
27.5
98.8
43.0
66.4
105.8
69.1
12.4
18.4
6.1
61.7
69.8
51.8
63.7
47.1
63.6
15.8
27.0
34.2
41.4
51.0
42.3
70.0
62.7

2006
87.9
22.7
29.6
31.3
67.6
4.3
24.9
95.9
39.6
63.7
106.5
64.6
10.7
18.0
6.7
65.6
63.7
47.4
62.0
47.7
64.7
12.4
26.7
30.4
39.2
45.9
43.4
68.3
61.3

2007
84.0
18.2
28.9
26.8
65.1
3.5
25.0
94.8
36.2
63.8
103.5
59.4
9.0
17.0
6.9
65.8
62.1
45.6
59.4
44.9
63.5
12.7
23.4
29.4
35.1
40.5
44.2
66.0
58.7

Source:  Commission services, Eurostat. 

1.2. 

PRIMARY BALANCE 

The primary balance is a crucial determinant of the 
change  in  the  debt  ratio.  Table  V.1.1  shows  the 
structural  primary  balance  for  the  years  2005-
2010,  with  the  values  given  for  2009  and  2010 
being  the  Commission  2009  Spring  forecasts.  It 
shows that overall, for the years 2005 to 2007, EU 
27  countries  had  a  structural  primary  surplus, 
while  for  2008,  2009  and  2010  a  growing 
structural primary deficit is forecast. For countries 
which  already  have  a  significant  level  of  debt,  a 
weak structural primary balance is a risk that must 
be taken into consideration. 

The level of debt also affects the political  climate 
within which economic policy is determined. Even 
in  the  absence  of  adverse  shocks,  a  high  level  of 
debt  involves  a  higher  level  of  interest  payments 
and  therefore  requires  a  consistently  positive 
primary  surplus  purely  to  service  the  debt,  and 

2009 
(forecast)
95.7
16.0
33.7
32.5
73.4
6.8
61.2
103.4
50.8
79.7
113.0
47.5
34.1
22.6
16.0
80.8
67.0
57.0
70.4
53.6
75.4
18.2
29.3
32.2
39.7
44.0
68.4
77.7
72.6

2010 
(forecast)
100.9
17.3
37.9
33.7
78.7
7.8
79.7
108.0
62.3
86.0
116.1
47.9
50.1
31.9
16.4
82.3
68.9
63.1
75.2
59.7
81.5
22.7
34.9
36.3
45.7
47.2
81.7
83.8
79.4

Change in debt 
ratio in 2009 and 
2010
11.4
3.2
8.1
0.3
12.8
3.0
36.4
10.4
22.8
18.0
10.3
-1.3
30.7
16.3
1.7
9.3
4.8
4.8
12.7
12.7
15.1
9.1
12.1
8.7
12.3
9.2
29.7
14.5
17.8

2008
89.6
14.1
29.8
33.3
65.9
4.8
43.2
97.6
39.5
68.0
105.8
49.1
19.5
15.6
14.7
73.0
64.1
58.2
62.5
47.1
66.4
13.6
22.8
27.6
33.4
38.0
52.0
69.3
61.5

higher  surpluses  to  reduce  its  level.  This  can  be 
politically  and  socially  difficult  to  sustain  and 
when  compounded  with  the  need  for  additional 
surpluses  to  address  the  needs  of  an  ageing 
population,  can  make  the  required  adjustments 
even more difficult. How significant a factor this is 
will  depend  on  the  institutions  and  the  political 
debate  within  a  country;  experience  shows  that 
while some countries are able to find the political 
consensus  and  will  to  reduce  high  levels  of  debt, 
others have proven less able or willing to do this.  

Whether  or  not  the  ability  to  take  measures  to 
contain  the  cost  of  ageing  will  be  correlated  with 
past  experience  in  reducing  debt  remains  to  be 
seen.  However,  insofar  as  countries  with  large 
sustainability  gaps  also  have  persistently  high 
levels of debt, the ability to run required surpluses 
must  be  judged  as  an  additional  risk  point,  over 
and above the risk attributable to the high levels of 
debt. 

71 

 
 
 
liabilities 
issues  by  other  government  units. 
Governments may, however, have significant other 
financial  assets  in  their  possession  as  shown  in 
Table V.1.2. 

Assets  should  be 
into  account  when 
taken 
assessing  the  sustainability  position  of  countries, 
as their disposal may contribute to reimburse debt 
and because they generate property income. Assets 
have  particularly  an  impact  on  sustainability  in 
cases  where  the  real  value  and  the  book  value  of 
assets  differ  or  the  returns  on  assets  are  different 
from the interest rate on debt.  

Table V.1.3: 

Structural primary balances as a share of GDP 

Structural primary balance as a % of GDP, outturn and forecast

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EA-16
EU-27

2005
3.2
2.7
-1.6
6.5
-0.2
0.4
2.3
-1.3
2.9
-1.5
-0.6
0.4
-1.1
-1.0
-0.2
-4.8
-0.2
2.6
1.5
-1.6
-2.9
-0.7
0.3
-0.1
4.4
2.9
-1.9
0.2
0.0

2006
2.5
3.3
-2.8
5.2
0.7
-0.5
2.8
0.0
3.4
-0.9
0.7
1.9
-2.8
-1.4
-0.4
-6.6
0.4
2.4
0.6
-1.9
-1.1
-2.3
-0.7
-2.3
4.3
2.3
-1.2
0.9
0.5

2007
2.3
3.1
-1.4
4.5
1.6
-0.7
-0.9
-0.4
3.2
-1.2
2.1
5.8
-4.1
-2.1
1.1
-1.5
0.0
1.2
1.0
-0.9
-0.5
-3.7
-0.4
-2.4
4.6
3.7
-1.5
1.1
0.7

2008
1.5
1.0
-2.3
5.6
1.6
-3.9
-6.4
-2.1
-2.4
-1.5
1.8
2.9
-4.9
-4.5
2.3
-0.2
-1.6
1.7
0.8
-3.1
-0.9
-7.2
-1.3
-3.5
4.2
3.4
-3.3
0.2
-0.4

2009
0.7
1.1
-2.9
2.9
0.6
-0.6
-7.6
-1.0
-5.2
-2.7
2.0
0.2
-8.1
-3.1
1.2
3.1
-0.2
0.0
-0.1
-3.1
-2.5
-3.7
-3.3
-3.7
2.1
0.9
-7.8
-0.9
-1.8

2010
0.0
2.4
-2.5
1.2
-0.9
-1.4
-9.0
0.1
-6.3
-2.5
2.0
0.1
-9.2
-3.9
0.7
2.9
0.7
-1.6
-0.6
-2.7
-1.8
-3.1
-3.4
-3.3
0.7
-0.5
-9.2
-1.5
-2.5

Source: Commission services. 

European Commission 

Sustainability Report - 2009 

Table V.1.2:  General government financial assets as a share of 

GDP 

1995
20.8
..
..
43.3
25.4
52.6
..
20.2
17.7
24.6
23.6
..
..
65.3
47.2
64.1
..
35.5
30.9
66.6
43.8
..
..
68.9
69.4
55.5
..

2000
16.2
78.9
..
31.4
26.0
40.2
23.5
26.1
22.3
30.0
26.1
25.1
31.2
54.3
59.9
28.2
..
28.9
36.2
29.9
33.7
74.8
..
45.1
83.5
59.2
..

2005
13.9
39.3
45.5
33.7
21.2
41.1
26.2
28.6
20.5
32.2
26.3
28.8
19.7
35.5
56.3
22.5
32.8
26.1
32.7
34.6
29.1
36.6
41.7
33.5
106.3
64.3
..

2006
14.3
35.2
44.6
36.6
21.3
40.1
27.6
29.6
22.4
33.5
26.5
26.8
19.3
35.2
..
20.2
25.6
23.4
32.7
35.5
29.0
30.2
42.9
27.4
112.9
69.1
..

2007
14.6
30.7
..
35.7
21.0
38.4
28.5
33.9
23.5
35.0
25.4
27.1
17.9
31.6
..
19.3
25.5
24.1
31.2
..
26.9
31.2
46.5
33.0
112.6
68.2
..

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK

Source: Commission services. 

At  the  end  of  2008,  six  countries  (Germany, 
France, Hungary, Malta, Austria and Portugal) had 
a  debt  ratio  between  60%  and  80%  of  GDP.  By 
2010,  it  is  forecast  that  four  countries  (France, 
Hungary,  Portugal  and  the  United  Kingdom)  will 
have debts between 80% and 100% of GDP, while 
the 
six 
Netherlands  and  Austria)  will  stand  at  between 
60% and 80%. 

Ireland,  Spain,  Malta, 

(Germany, 

All countries except Cyprus are expected to see an 
increase  in  their  debt  ratios  between  2009  and 
2010  and  for  some  of  these  the  increase  is 
substantial. While on average the EU  27 debt ratio 
is  set  to  increase  by  14.5  percentage  points,  for 
Ireland,  Latvia  and  the  United  Kingdom  the 
increase  is  forecast  to  be  around  or  above  30 
percentage point of GDP. Nine countries, however, 
(Bulgaria, the Czech Republic, Denmark, Estonia, 
Lithuania,  Luxembourg,  Romania,  Slovenia  and 
Slovakia)  are  still  expected  to  have  debt  at  below 
40% of GDP at the end of 2010. 

1.3.  GOVERNMENT ASSETS 

The debt figures used in this report are defined in 
gross  and  consolidated  terms;  this  means  that 
financial  and  non-financial  assets  controlled  by 
government  are  not  netted  out,  unless  they  are 

72 

 
 
 
 
 
 
 
 
2. 

PENSION PROJECTIONS 

2.1. 

PENSION EXPENDITURE PROJECTIONS 
AND SOCIAL AND POLITICAL RISKS. 

The 
relationship  between  having  an  ageing 
population  and  the  increase  in  the  long-term 
expenditure  on  pensions  is  not  linear.  Countries 
with  less  generous  schemes  or  with  planned 
reductions to their generosity face less pressure on 
their  public  finances  for  same  ageing  profile  than 
countries  which  provide  more  generous  benefits 
for the aged.  

the  change 

Public  pension  expenditure  can  be  decomposed 
into four main parts. These are (i) the change in the 
dependency  ratio  which  is  a  function  of  the 
demographic  profile,  (ii) 
the 
coverage  ratio  which  considers  the  number  of 
individuals  eligible  for  public  pensions  relative  to 
population  aged  over  65,  (iii)  the  change  in  the 
employment  rate  amongst  those  of  working  age 
and  (iv)  the  benefit  ratio  which  measures  the 
generosity  of  public  pensions  in  relation  to  the 
average wage (28). 

in 

Overall,  the  expected  change  in  the  benefit  ratio 
will contribute to lessening the impact of an ageing 
population on the public finances as the generosity 
of  public  pensions  is  expected  to  fall.  This  is 
shown  in  Table  V.2.1,  along  with  the  effect  that 
any change in the benefit ratio will have on public 
pension  expenditure  as  a  share  of  GDP.  Only  in 
Ireland,  Greece,  Cyprus,  Romania  and  the  United 
Kingdom are changes in the benefit ratio expected 
to  contribute  to  the  increase  in  the  long-term 
change  in  expenditure  –  in  all  other  countries  a 
reduction in the relative value of age related social 
security benefits compared with the gross average 
wage  is  envisaged.  Greece  not  only  has  an 
increasing benefit ratio, but starts from the highest 
benefit ratio of all EU Member States. 

At  the  other  end  of  the  scale,  reductions  in  the 
benefit  ratio  in  Poland,  Italy,  Austria,  Portugal, 

(28)  To wit: 

Exp

Pension
GDP

.

=

6

Dependency
444 7
Population

Population

Effect

Ratio
6444 8
+
64

65
−

15

×

Number

effect

Ratio
7

Coverage
4444
of
Population

4444
8
Pensioners
65

+

Sweden,  France,  Latvia  and  Estonia  are  expected 
to  lead  to  a  decline  in  the  ratio  of  the  public 
pension expenditure relative to GDP of over 3% of 
GDP. For all these countries, the ratio between the 
average  pensions  and  the  economy-wide  average 
wage  is  set  to  fall  by  between  25%  (France)  and 
54% (Poland). The effect that this will have on the 
standard  living  of  pensioners  will  depend  on  the 
extent  that  it  is  anticipated  and  on  the  other 
provision  that  pensioners  have  made  (whether 
through  mandatory  or  voluntary  private  funded 
pension  provision  or  their  own  personal  savings). 
For  example,  in  Sweden,  Estonia,  Latvia,  Poland 
and  Slovakia,  reductions  in  the  public  pension 
benefit 
the 
accompanying  increase  in  funded  private  pension 
is  taken  into  account.  Alternatively,  individuals 
may change their behaviour in the light of reduced 
public  pensions  and  choose  to  work  longer,  thus 
accumulating  pension  entitlements  and  relieving 
pressure on the pension system and providing them 
with  a  higher  standard  of  living  when  they  do 
retire. 

ratio  are  not 

stark  once 

so 

Countries whose current policy will lead to strong 
declines  in  their  benefit  ratios  may  come  under 
significant  political  pressure  to  introduce  ad  hoc 
increases to pension levels or to change their social 
security systems to increase the standard living of 
pensioners.  As  Chapter  2  showed,  the  ratio  of 
people  aged  65  or  above  relative  to  the  working 
age  population  is  projected  to  more  than  double 
from 25% in 2007 to 2060 to 54% making them a 
significant constituent of electorates. 

Aside  from  the  countries  that  are  forecast  to  have 
significant  falls  in  their  benefit  ratios,  there  are 
countries  that  are  expected  to  have  low  levels  of 
pension provision, even if the decrease in the ratio 
is not as significant. By 2060, Bulgaria, the Czech 
Republic,  Denmark,  Estonia,  Ireland,  Latvia, 
Lithuania,  Hungary,  Austria,  Poland,  Portugal, 
Romania, Slovenia, Slovakia, Sweden and the UK 
are predicted to have benefit ratios of below 40%, 
although  once  private  pensions  are  taken  into 
account only the Czech Republic, Estonia, Ireland, 
Latvia,  Lithuania,  Hungary,  Austria,  Poland, 

6

Employment
4444
7
Population

Effect

8

Rate
64444
64
15
People
−

−
15

64

×

Working

×

Effect

Benefit
4444
Average

Ratio
7

4444
8
Pension

: 

Hours

GDP
Worked

15

−

71

73 

 
                                                           
 
 
European Commission 

Sustainability Report - 2009 

Table V.2.1: 

Benefit ratio – 

benefit ratio %

public pensions
2060
43
36
38
38
42
16
32
80
52
48
47
57
13
28
44
36
40
41
39
26
33
37
39
33
47
30
37

% change
-4
-20
-17
-4
-17
-40
16
10
-10
-25
-31
5
-47
-16
-4
-8
-6
-7
-30
-54
-29
26
-6
-27
-5
-39
7

2007
45
44
45
39
51
26
27
73
58
63
68
54
24
33
46
39
42
44
55
56
46
29
41
45
49
49
35

public and private pensions
2007
2060

% change

44.4

64.0
51.4
26.5

40.9

74.6
42.5
21.8

-7.8

16.6
-17.3
-17.7

62.1

56.9

-8.3

24.0
33.1
45.8
38.9

73.8

56.2
47.3
29.4
40.9
45.2

63.9

24.8
32.5
44.0
37.6

80.9

31.2
32.6
41.4
40.2
40.2

46.4

3.5
-1.9
-3.9
-3.2

9.6

-44.4
-31.2
41.0
-1.7
-10.9

-27.5

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EA-16
EU-27

Change in  

Average real

GDP ratio due %change in pensions
to benefit ratio
-1.0
-1.8
-1.2
-0.5
-2.2
-3.1
0.7
0.8
-1.7
-4.0
-5.5
-0.3
-3.9
-1.8
1.2
-1.1
-0.5
-0.6
-5.0
-7.1
-4.5
1.7
-0.7
-2.4
-0.9
-4.3
0.5

per year 2010-2060
1.6
2.4
1.8
1.6
1.3
1.5
2.0
2.2
1.6
1.1
0.8
1.9
1.3
2.2
2.0
2.1
1.8
1.6
1.0
0.9
1.2
3.4
2.1
1.9
1.7
0.8
1.9
1.4
1.3

Source: Commission services 

Portugal  and 
threshold (29).  

the  UK 

remain  below 

this 

kind of guarantees or other support the government 
provides to those schemes.  

The  countries  forecasting  low  benefit  ratios  are 
also  liable  to  pressure  to  increase  spending.  This 
may  be  particularly  in  the  case  of  the  newer 
Member States, which have lower benefit ratios on 
average.  However,  it  is  difficult  to  assess  the 
possible  magnitude  of  these  pressures,  as  even  in 
the  absence  of  private  pensions  individuals  may 
have other forms of support such as drawing down 
of accumulated assets or savings and it is likely to 
be the overall standard of living of pensioners that 
is  important.  Individuals  might  also  change  their 
behaviour by choosing to retire later or provide for 
their  retirement.  On  the  other  hand,  the  provision 
of  support  from  a  private  scheme  also  entails 
substantial  of  uncertainty  in  so  far  as  the  level  of 
the pensions received depends on the performance 
of  asset  markets  or  other  factors  of  the  economy, 
depending on the way the private pension schemes 
are organised, how they invest their assets and the 

(29)  For  some  countries,  data  on  the  expected  benefit  ratios 
from funded private pensions are not available, which may 
have implication on data comparability. 

74 

The final column in table V.2.1 shows the average 
real  increase  in  pensions  implied  by  the  benefit 
ratios  for 
the  public  pensions.  On  average, 
pensions are set to increase by 1.4% per annum in 
real terms for the EU as a whole. Within that total, 
all countries, even those with marked falls in their 
benefit  ratios  are  forecasting  real  terms  increases. 
In  addition,  some  countries  with  falls  in  their 
benefit  ratios  (such  as  Latvia)  have  reasonably 
high increases in their real levels, as comparatively 
high growth is forecast. Nevertheless, a real rate of 
growth  may  not  be  sufficient  to  ease  the  political 
pressure of pensions falling relative to wages in a 
number of Member States.  

the 

The  projections  of  pension  expenditure  depend 
significantly  on 
(and 
assumptions)  on  indexation.  In  a  large  number  of 
countries (Belgium, Bulgaria, the Czech Republic, 
Denmark,  Germany,  Estonia,  Greece,  Spain, 
Ireland,  Italy,  Latvia,  the  Netherlands,  Portugal, 

statutory 

rules 

 
                                                           
 
 
Finland,  Sweden,  the  UK) (30)  the  projection  for 
minimum  pensions/old  age  allowances  assumes 
indexation  in  part  to  wages,  and  in  some  of  them 
(Bulgaria,  the  Czech  Republic,  Greece,  Spain, 
Ireland,  Italy,  Finland,  Sweden,  Lithuania),  the 
pension  projection  for  minimum  pensions/old  age 
allowances  assumes  a  higher  indexation  than 
foreseen  in  the  legislation  (e.g.  to  wages  despite 
the  fact  that  the  legislated  indexation  postulates 
indexation  to  prices).  Under  the  assumption  that 
the minimum pension/old age allowances are set at 
a level considered to ensure a minimum income for 
this 
subsistence  (a  basic  social  safety  net), 
modelling  choice  may  be  considered  as  fairly 
neutral.  

For the countries that assume price indexation, the 
projections,  may  underestimate  the  future  actual 
spending on minimum pensions due to the political 
need to ensure adequate pension income for older 
people  –  particularly  those  at  the  bottom  of  the 
income  distribution.  Still,  since  in  almost  all 
Member  States  the proportion of public  minimum 
pensions 
total  public  pension 
to 
expenditure  is  small,  the  size  of  this  possible 
underestimation  may  not  be  of  a  very  significant 
magnitude. 

in  relation 

2.2. 

PRIVATE FUNDED PENSION SCHEMES AND 
FINANCIAL RISKS  

Alongside public pensions, private funded pension 
schemes,  both  mandatory  and  voluntary,  are 
increasingly  becoming  an 
important  part  of 
retirement income, and are likely to be even more 
so in the future. This development is supported by 
policies  in  a  number  of  Member  States;  reforms 
that  enhance  the  sustainability  of  public  pension 
systems reduce their generosity, and incentives for 
private  pillars are  being  initiated  to fill  the  gap  in 
pension provision.  

Graph V.2.1 shows the private pension projections 
by pillar for the Member States for which data are 
available.  The  graph  is  not  comprehensive;  for 
some  countries'  private  pensions  schemes  it  was 
not possible to provide data or projections. This is 

(30)  It  should  be  noted  that  for  some  countries,  projection  for 
minimum  pensions  or  social  allowances  are  not  available. 
This missing data may underestimate pension expenditure. 

Chapter V 

Other factors 

in  part  because  the  expenditure  of  non-public 
pension schemes will depend on the assets held in 
them and this can be difficult to quantify,. Indeed, 
for  occupational  pension  expenditure,  only  six 
Member  States 
Ireland,  Spain, 
(Denmark, 
Netherlands,  Portugal  and  Sweden)  provided 
projections,  while  only  thirteen  Member  States 
(Denmark,  Greece,  Ireland,  the  Czech  Republic, 
Estonia,  Hungary,  Lithuania,  Latvia,  Malta, 
Poland,  Slovakia,  Bulgaria  and  Romania)  have 
indicated  that  non-public  occupational  pension 
schemes  do  not  exist.  For  the  remaining  eight 
the  data  are  missing.  For  private 
countries 
mandatory pension schemes,  eight Member States 
(Bulgaria,  Estonia,  Latvia,  Lithuania,  Hungary, 
Poland,  Slovakia  and  Sweden)  have  provided 
projections  while  nine  Member  States  (Belgium, 
Denmark,  Greece,  Spain,  Ireland,  Netherlands, 
Portugal,  Czech  Republic  and  Malta)  report  that 
such  pension  do  not  exist.  For  private  non-
three 
mandatory  pension  expenditure,  only 
Member States (Spain, Slovenia and Sweden) have 
provided  projections  and 
(Denmark, 
Germany,  Ireland,  Latvia,  Malta,  Poland  and 
Bulgaria) report that they do not exist. 

seven 

very 

pillars 

are  making 

A number of countries have implemented systemic 
pension  reforms,  shifting  part  of  the  previously 
public  pillar  to  a  mandatory  funded  private  pillar 
(Bulgaria,  Germany,  Estonia,  Latvia,  Lithuania, 
Hungary,  Poland,  Slovakia  and  Sweden).  For  the 
Member  States  for  which  data  on  these  schemes 
are  available,  graph  V.3.1  shows  that  while  these 
private 
small 
disbursements for the time being, their importance 
will  increase  in  the  future  reaching  around  1.5  to 
2.5%  of  GDP 
in  Bulgaria,  Estonia,  Poland, 
Romania,  Lithuania,  Hungary,  Slovakia  and 
Sweden and nearly 5% of GDP in Latvia. As these 
funds  have  not  started  to  pay  out  pensions,  only 
Hungary  and  Sweden  provided  a  level  of  pension 
expenditures by mandatory private funds for 2007, 
although in comparison to GDP the value is close 
to  zero.  In  addition,  significant  pension  income  is 
already  received  in  Sweden,  Denmark  and  the 
Netherlands  from  occupational  pension  schemes 
and this is set to increase considerably by 2060. By 
then  it  is  forecast  to  reach  over  3%  of  GDP  in 
Sweden, around 9% in Denmark and over 12% in 
the Netherlands. It should be pointed out that these 
schemes have been in place for a long time and so 
are already providing top-ups to public schemes. 

75 

 
                                                           
European Commission 

Sustainability Report - 2009 

Graph V.2.1:  Expenditure of non-public occupational, private mandatory and non-mandatory pension (% of GDP) 

14

12

10

8

6

4

2

0

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

7
0
0
2

0
6
0
2

PT

SI

ES

BG

EE

PL

RO

LT

HU

SK

LV

SE

DK

NL

Occupational

Private mandatory

Private non-mandatory

Source:  Commission services, EPC 

Pension  income  from  these  pension  funds  is 
affected  not  only  by  the  contributions  made,  but 
also by developments in the financial markets. The 
volatility  of  pension  income,  at  least  in  the  short 
term, with respect to financial markets will depend 
on  the  design  of  the  pension  scheme,  which  can 
influence the final effect of shocks on the value of 
the fund's assets. A first distinction is that between 
defined  benefit  and  defined  contribution  schemes. 
In  a  defined  benefit  scheme,  a  contributor  to  the 
scheme received an pension scheme that is fixed in 
advance  –  this  is  the  case,  for  example,  in  final 
salary schemes where the level of pension income 
is  set  as  a  percentage  of  final  (or  average)  salary. 
Conversely,  purely 
individual  schemes  where 
individuals contribute over the working lives into a 
personal fund which is invested and which is then 
used 
to  purchase  an  annuity  are  defined 
contribution  schemes,  where  the  value  of  the 
pension is a function of the total size of the assets 
of accumulated. Defined contribution schemes are 
typically  more  affected  by  the  performance  of 
financial  markets  in  the  short  term,  although  the 
extent  to  which  they  are  will  depend  on  the 
investment  strategy 
important 
characteristic of such schemes though is that all the 
risk associated with the level of pension income is 
transferred  to  the  individuals  while  in  defined 

followed.  An 

76 

benefit  schemes  the  organisation  running  the 
scheme absorbs some or all of the risk. 

However,  over  the  longer  terms  economic  shocks 
or lower returns to capital will also affect defined 
benefit  schemes,  albeit  while  spreading  the  risk 
between  more  individuals  and  over  the  longer 
period.  Over the longer term, however, all private 
pension  schemes  will  need  to  break  even  and  the 
returns to individuals investing in the schemes will 
need  to  adjust  to  reflect  the  overall  returns  to 
capital.  Nevertheless,  for  a  given  individual  just 
before  retirement,  there  is  usually  more  risk  in  a 
defined contribution scheme. 

In recent years, many defined benefit occupational 
pension  schemes  have  switched  towards  defined 
contribution  schemes.  Most  private  pension  funds 
were  constructed  as  defined  contribution  schemes 
from the beginning. An increasing role of defined 
contribution  schemes  has  and  will  have  important 
implications 
the  pensioners'  asset  value 
depending on the rate of return and the volatility of 
asset  markets.  While  they  provide  an  addition  to 
the pension income provided by the state, they also 
present  an  element  of  risk  in  the  event  of  the 
funds  not  matching 
performance  of 
expectations.  

the 

for 

 
3.  CONTINGENT LIABILITIES 

Government  debt  includes  the  explicit  liabilities 
that governments have incurred through borrowing 
– short  and  long-term  loans  and  bonds  –and  that 
they need to service. However, there are a number 
of  other  government  commitments 
that  are 
typically  not  included  in  debt.  These  consist  of 
implicit 
Implicit 
liabilities  are  not  backed  up  by  law,  but  involve 
spending  for  which  there  is  an  expectation  that  it 
will  continue  or  materialise.  Contingent  liabilities 
are those which the government will only need to 
assume if certain situations occur.  

contingent 

liabilities. 

and 

Implicit and contingent liabilities are not mutually 
exclusive  categories  but  different  dimensions  of 
categorisation.  Spending  commitments  can  be 
either implicit or explicit depending on their legal 
backing 
contingent  or  non-contingent 
depending  on  whether  their  status  depends  on  the 
realisation  of  an  uncertain  event  outside  the 
government's full control. 

and 

The scale of contingent commitments of the public 
sector can only be assessed by setting out explicit 
parameters that determine what will and what will 
not  be  considered.  This  is  because  aside  from  the 
explicit contingent liabilities that are backed up by 
legal provision – such as guarantees to borrowing 
of  public  and  private  enterprises  –,  there  are  also 
implicit contingent liabilities whose scope is open. 
Moreover,  even once  the  scope of  liabilities  to be 
considered  has  been decided,  the data  may  not be 
contingent 
available. 
liabilities  due  to  government  support  measures  in 
the  crisis  should  lead  to  improved  statistical 
understanding  and  measures  of  these  liabilities  in 
due  course.  An  assessment  of  the  value  of  those 
liabilities  and  commitments  would  require  an 
understanding  of  the  probability  of  situations  that 
give  rise  to  liabilities  occurring,  and  the  size  of 
these liabilities under the various outcomes. This is 
an  exercise  beyond  the  scope  of  this  report  and 
which can only ever be undertaken incompletely.  

Increased 

interest 

in 

institutions. These are explicit contingent liabilities 
as  they  represent  the  magnitude  of  government 
underwriting 
the 
government's  balance  sheet  unless  the  guarantees 
are  called  in.  For  some  Member  States  these  are 
particularly significant. 

that  will  not  appear  on 

In  addition  to  these,  the  government  have  aided 
their  financial  sectors  through  capital  injections, 
the  relief  of  impaired  assets,  and  underwriting 
liquidity  and  bank  support  schemes.  The  capital 
injections  appear  on  the  public  sector's  balance 
sheet  and  so  provide  the  governments  with  assets 
which  they  sell  in  the  future,  but  whose  value  is 
nevertheless subject to uncertainty. The asset relief 
and  liquidity  and  bank  support  schemes,  are  a 
mixed set of interventions, some of which transfer 
risk  to  the  public  sector  without  an  outlay  that 
appears in debt, thereby also increasing the explicit 
contingent liabilities of the government (31). 

However,  aside  from  these  schemes  which  have 
been  quantified,  governments  also  provide 
guarantees to depositors, which will only impose a 
cost  to  the  government  if  they  are  called  in.  The 
final  column  of  table  V.3.1  shows  the  value  of 
limit of the deposits that Member States guarantee. 
While  different  governments  have  different 
explicit limits, implicitly it might well be the case 
that  Member  States  with 
limits  find 
themselves  under  political  pressure  to  reimburse 
the full amount of deposits in the event of a bank 
run or collapse. 

lower 

In  the  light  of  the  economic  and  financial  crisis, 
many  Member  States  have  taken  on  explicit 
contingent  liabilities  to  aid  the  functioning  of  the 
financial sector. These are presented in the first six 
data  columns  of  table  V.3.1,  and  how  they  affect 
the  public  sector  risk  differs  depending  on  their 
nature. Columns three and four show the approved 
and  effective  guarantees  provides  to  financial 

(31)  For an explanation on the recording in national accounts of 
these  measures,  see  ‘Public  Finances  in  EMU-2009,’ 
section II.1, European Economy,5/2009. 

77 

 
                                                           
European Commission 

Sustainability Report - 2009 

Table V.3.1: 

Public interventions in the banking sector as a share of GDP 

Public interventions in the banking sector (% GDP)

Capital injections

Guarantees on bank 
liabilities

Relief of impaired asset 
and liquidity and bank 
support

Total 
approved 
measures
5.3
0.0
0.0
6.1
4.4
0.0
6.6
2.0
0.0
1.2
1.3
0.0
1.4
0.0
6.9
1.1
0.0
6.4
5.5
0.0
2.4
0.0
0.0
0.0
0.0
1.6
3.5
2.7
2.7

Effective 
capital 
injections 
6.1
0.0
0.0
2.4
2.0
0.0
6.5
1.5
0.0
1.2
0.1
0.0
0.9
0.0
7.9
0.1
0.0
6.8
1.7
0.0
0.0
0.0
0.4
0.0
0.0
0.2
2.6
1.7
1.7

Total 
approved 
measures
70.8
0.0
0.0
253.0
18.6
0.0
164.7
6.1
18.6
16.6
NA
0.0
25.7
0.0
12.4
5.9
0.0
34.3
25.7
0.0
10.0
0.0
32.8
0.0
27.7
48.5
21.7
24.6
20.5

Guarantees 
granted
16.3
0.0
0.0
2.5
7.2
0.0
164.7
1.2
2.1
5.5
0.0
0.0
2.8
0.0
NR
0.0
0.0
7.7
6.8
0.0
3.3
0.0
6.3
0.0
0.0
11.0
11.3
7.8
7.8

Total 
approved 
measures
8.1
0.0
0.0
0.3
1.4
0.0
0.0
3.3
2.8
0.2
0.0
0.0
10.9
0.0
0.9
0.0
0.0
11.4
7.1
0.0
0.0
0.0
0.0
0.0
0.0
12.6
16.4
4.1
2.1

Effective 
interventions
8.1
0.0
0.0
0.3
1.4
0.0
0.0
1.8
1.8
0.2
0.0
0.0
4.7
0.0
0.9
2.6
0.0
5.5
2.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
14.7
3.0
1.4

guarantees 
on deposits 
(€ or % of 
deposits)
100 000
50 000
50 000
100%
100%
50 000
100 000
100 000
100 000
70 000
circa 103 000
100 000
50 000
100 000
10000.0
100%
100 000
100 000
100%
50 000
100 000
50 000
100%
100%
50 000
50 000
50 000 (**)

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK
EA-16
EU-27

Source: Commission services 

78 

 
 
 
4. 

TAX RATIO 

shows 

sustainability  gap  analysis 

The 
the 
additional  resources  that  must  be  channelled  into 
making  the  public  finances  sustainable.  A  first 
option  would  be  to  reduce  the  costs  imposed  by 
ageing  population  through  reform  of  support  for 
pensioners  or  through  changes  to  the  labour 
market.  Previous  chapters  presented  an  overview 
of the expected trajectory of the level of pensions 
and discussed potential risks around their level.  

Graph V.4.1:  Receipts and spending as a share of GDP 

RO

LT

LV

EE

IE

SK

CY

PL

BG

MT

EL

CZ

PT

ES

UK

HU

SI

LU

NL

EU-27

DE

EA-16

IT

FI

AT

FR

BE

SE

DK

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

2000-07 average tax burden

2008 tax burden

2000-07 average spending

Source: Eurostat 

in  other 

categories, 

In the absence of reforms to the costs of ageing, or 
cuts 
the 
expenditure 
sustainability  gap    will  have  to  be  closed  by 
adjusting tax revenues. How feasible or easy that is 
will depend, in part, on the pre-existing situation in 
the  different  Member  States.  Member  States  with 
high  levels  of  tax  revenues,  might  find  it  hard  to 
increase  taxation  further.  This  is  both  because  it 
might  be  politically  difficult  to  persuade  voting 
taxpayers 
and  because 
economically  there  might  be  concern  about  the 
deadweight cost of high taxes on the economy, as 
higher  taxes  will  usually  constitute  a  disincentive 
to  work  and  reduce  competitiveness.  Conversely, 

increase 

taxes 

to 

amongst  some  countries  with  traditionally  high 
levels  of  tax,  there  might  be  other  factors  that 
would  ease 
tax  raising 
the  pressure  against 
measures.  For  example,  Member  States  with 
relatively efficient tax and expenditure systems, or 
which  place  more  weight  on  distributional  than 
efficiency arguments, might be more willing have 
larger government sectors. 

Graph  V.4.1  shows  general  government  total  tax 
receipts (including social security contributions) as 
a share of GDP for the 2000–07 period on average, 
and for 2008, as well as spending over the 2000-07 
year on average. It shows that there is considerable 
variation  between  Member  States'  tax  receipts, 
with  Romania,  Lithuania,  and  Latvia  receiving 
under 30% of GDP on average between 2000 and 
2007  and  France,  Belgium,  Sweden  and Denmark 
over 45% (32).  

Instead, 

None  of  the  countries  in  the  top  third  of  tax 
burdens  are  amongst  the  highest  in  terms  of  their 
sustainability  gap. 
countries  with 
significant  sustainability  gaps  tend  to  have  low  to 
medium  tax  burdens.  It  is  the  countries  in  the 
middle of table with very large sustainability gaps 
(Luxembourg,  Slovenia,  the  United  Kingdom  and 
Spain)  that  will  turn  into  relatively  high  tax/large 
their 
they  close 
if 
government  economies 
sustainability  gaps  mainly 
through  additional 
taxation.. 

(32)  In addition to tax, countries receive income from property 
and own production which is not represented in the graph. 

79 

 
 
                                                           
Chapter VI 
Overall classification of the long-term risks to the 
sustainability of public finances 

 
 
SUMMARY 

On  the  basis  of  the  quantitative  sustainability 
indicators  (Chapter  III),  the  sensitivity  analysis 
(Chapter  IV)  and  additional    factors  (Chapter  V), 
an  overall  assessment  of  the  long-term  risks  to 
public finance sustainability the different Member 
States might face is reached, i.e. how important the 
long-term risks to public finance sustainability are 
and  where  they  mainly  stem  from.  This  chapter 
sums  up  the  results  of  the  analysis  carried  out  in 
the  previous  chapters  and  explains  how  the 
different  factors  are  taken  into  account  so  as  to 
reach  an  overall  assessment  of  the  long-term 
sustainability of public finances.   

In  order  to  indicate  the  relative  importance  of  the 
risks,  a  three  level  categorisation  is  used  in  this 
report: low / medium / high long-term risk, similar 
to  the  one  used  in  the  2006  Sustainability  Report 
and  by  the  Commission  and  the  Council  in  the 
assessments for the previous rounds of the stability 
and  convergence  programmes.  It  provides  a  clear 
distinction  of  the  degree  of  risk  countries  might 
face  with  regard  to  long-term  public  finance 
sustainability and at the same time recognises that 
ageing population represents a budgetary challenge 
over  the  long-term  for  all  countries,  albeit  to 
varying  degrees.  In  particular,  low  long-term  risk 
countries  also  face  a  risk  and  may  need  to 
implement  reforms.  However,  an  assessment  of 
low  long-term  risk  implies  that  the  need  for 
adjustments  of  the  country  is  less  severe  or  less 
urgent than for countries assessed to be at medium 
and high long-term risk.  

While  this  categorisation  gives  a  clear  indication 
of  the  relative  degree  of  long-term  risk  different 
countries  are  facing,  the  overall  assessment  also 
provides an indication of where the long-term risks 
mainly  stem  from.  In  particular,  the  extent  to 
which  the  long-term  risks  are  mainly  related  to 
medium-term 
budgetary 
developments is addressed.  

long-term 

or 

to 

83 

 
 
1.  OVERALL ASSESSMENT 

1.1. 

THE SUSTAINABILITY INDICATORS  

The  sustainability  indicators  provide  a  firm  and 
objective  basis  to  classify  the  long-term  public 
finances  sustainability  risks  in  the  EU  Member 
States, though the margins of error surrounding the 
projections  are  large,  and  there  are  even  some 
projection 
the  partial 
inconsistencies  given 
equilibrium approach. 

This report has put emphasis on the more stringent 
S2  indicator.  The  starting  point  for  the  long-term 
projections  was  the budgetary  projection for  2009 
of the Commission’s spring 2009 forecasts. The S2 
the  concept  of 
indicator 
sustainability  of  public  finances  over  an  infinite 
horizon  and  is  based  on  regarding  budgetary 
developments  and  on  the  most  recent  comparable 
information  regarding  the  long-term  impact  of 
ageing populations on public expenditure.  

is  consistent  with 

Alongside  the  S2  indicator,  the  relative  value  of 
the  S1  indicator  is  considered  as  it  gives  an 
indication of the urgency of any necessary reforms. 
Where the S1 indicator is markedly lower than the 
S2,  the  satiability  constraints  will  materialise 
further  in  the  future  and  therefore  allows  the 
Member  State  a  bit  more  time  to  implement  the 
necessary  reforms  without  risking  as  large  an 
impact on their government gross debt. 

1.2.  ADDITIONAL FACTORS 

an  overall 

assessment  on 

To  make 
the 
sustainability  of  public  finances,  other  additional 
relevant  factors  are  taken  into  account  in  order  to 
better qualify the assessment with regard to where 
the  main  risks  are  likely  to  stem  from  and  to 
consider the impact of relevant factors not (or not 
sufficiently) 
sustainability 
indicators. Taking into account these other relevant 
factors  may  lead  to  a  somehow  different  overall 
assessment  than  the  one  that  would  result  from 
evaluating the sustainability indicators only.  

reflected 

the 

in 

1.2.1.  Additional factors concerning the 

current and medium-term budgetary 
position  

the  risks 

calculating 

The level of the outstanding government debt is 
arguably the most important additional factor (see 
Chapter  V).  Indeed,  while 
the  sustainability 
indicators  already  include  information  on  the 
current  level  of  debt,  they  do  not  incorporate  all 
the  specific  risks  faced  by  countries  with  a  large 
initial  level  of  debt.  First,  high-debt  countries  are 
more  sensitive  to  short/medium  term  shocks  to 
economic  growth  and  to  interest  rates  changes. 
Second,  a  high  level  of  debt  may  lead  to  higher 
interest  rate  than  assumed  in  the  projections  and 
to  public  finance 
increase  further 
sustainability.  Third,  when 
the 
sustainability  indicators,  it  is  assumed  that  all 
countries are able keep their primary balance as a 
share  of  GDP  at  its  current  level  in  the  future. 
High-debt countries need to maintain large primary 
surpluses for a prolonged period of time in order to 
reduce their debt ratio. This may prove difficult in 
view of other competing budgetary pressures. This 
factor  is  used  symmetrically  as  a  risk-increasing 
factor  for  very  high  debt  countries  (notably 
Belgium,  Greece,  Italy  and  Hungary)  and  a  risk-
decreasing  factor  for  very  low  debt  countries 
(notably  Bulgaria,  Estonia,  Luxembourg  and 
Romania).  A  note  of  caution 
to 
assessments  of  France,  Portugal  and  United 
Kingdom,  where  the  difficulties  of  the  economic 
and  financial  crisis  seem  likely  to  add  to  their 
sustainability  risk  through  high  resulting  levels  of 
debt.  

is  added 

A  country's  primary  balance  is  also  informative 
with  regards  to  changes  to  its  debt  level.  A 
negative  primary  balance  is  associated  with  a 
rising debt burden while a positive one with falling 
debt  as  a  share  of  GDP.  The  Commission  2009 
spring forecasts are used to look at the structural 
primary balance evolution over the years 2008 to 
2010.    The  forecast  deterioration  of  the  structural 
primary  balance,  is  seen  as  risk  increasing  factor 
for  eleven  Member  States  (Denmark,  Germany, 
Ireland,  Spain,  Cyprus,  Latvia,  Netherlands, 
Slovenia,  Finland,  Sweden  and  United  Kingdom), 
of  which  three  (Denmark,  Latvia  and  UK)  have  a 
particularly  marked  deterioration  which  should  be 
flagged  as  a  strong  risk-increasing  factor.  In  the 

84 

 
Overall classification of the long-term risks to the sustainability of public finances 

Chapter VI 

case  of  Denmark,  however,  the  deterioration 
comes from a very healthy starting position. 

The analysis of contingent liabilities (see Chapter 
V,  Section  4)  is  an  increasingly  important  part  of 
the  budgetary  surveillance  process  regarding  the 
medium-term  budgetary  developments,  as  their 
stock  is  non-negligible  and  may  entail  significant 
fiscal  risks.  However,  as  data  are  scarce  and  only 
available  on  explicit  contingent  liabilities  and  as 
the  distinction  between  explicit  and 
implicit 
liabilities  is  not  so  clear-cut  economically  a  level 
of caution must be exercised when determining the 
relative risks of different countries.  

1.2.2.  Additional factors concerning the long-
term budgetary developments 

in 

the 

The  evolution  of  the  benefit  ratio  is  strongly 
driven  by 
the  pension  system  features  and 
therefore  by  any  reforms  that  have  been  enacted 
(see  Chapter  V).  A  decrease  in  the  public  benefit 
ratio usually leads to a reduction (or slowdown) in 
government  expenditure  in  pensions.  However,  it 
can  also  lead  to  other  risks  to  public  finances,  if: 
(i)  it  leads  to a  substantial  increase  in  the poverty 
rate  of  older  people,  which  may 
require 
government assistance; (ii) moreover, the projected 
fall in the benefit ratio may be associated to a large 
increase 
social 
relative 
contributions that are diverted from social security 
or  other  public  pension  schemes 
to  private 
schemes,  which  may  affect  public  revenue.  The 
sustainability  indicators  in  Poland  are  clearly 
dependent  on  such  a  marked  decrease  in  the 
benefit ratio that there is significant upward risk to 
the  sustainability  gap  from  political  pressure.  For 
Austria, Portugal and Sweden the decrease is also 
an  additional  risk.  Conversely,  the  high  and 
increasing benefit ratio for Greece must be seen an 
indication  of 
that  are 
necessary  in  the  country  to  address  its  very  large 
sustainability gap. 

types  of  reforms 

share  of 

the 

The  assessment  is  made  fundamentally  on  the 
basis of a central demographic and macroeconomic 
scenario, which is further discussed in the Ageing 
report.  However, 
tests  provide 
information  on  the  robustness  of  the  results  with 
respect  to  changes  in  some  key  parameters.  Also, 
different assumptions concerning the main drivers 
of expenditure can have a large impact on the size 
of  the  increase  in  age-related  expenditures,  for 

sensitivity 

example  concerning  the  income  elasticity  for 
health-care.  There  is  therefore  some  uncertainty 
regarding  the  size  of  the  sustainability  challenge 
that  EU  countries  are  facing.  Sensitivity  tests 
illustrate 
impact  of  different 
uncertainties materialising. 

the  possible 

A  high  current  tax  ratio  leaves  limited  room  of 
manoeuvre  for  using  tax  increases  to  finance 
additional  public  expenditure  as  compared  to  a 
lower tax ratio (see Chapter IV.5). This is the case 
for  Belgium,  Denmark,  Italy  and  Sweden,  with 
Belgium combining a high tax ratio with a need to 
reduce  its  very  high  debt.    By  contrast,  low  tax 
ratios  are  not  considered  to  be  a  risk-reducing 
factor,  since  a  possible  decision  regarding  an 
increase  of  the  tax  ratio  would  not  only  take  into 
account the financing needs resulting from ageing 
the  size  of  public 
but  would  depend  on 
procurement 
the 
services, 
and 
good 
effectiveness  of  tax  systems,  the  structure  of  the 
tax system and its impact on growth.  

of 

1.3.  OVERALL ASSESSMENT 

Table  V.1.1  presents  an  assessment  of  the  long-
term risks associated with the S2 indicator and lists 
the  main  additional  factors  that  are  taken  into 
account  when  reaching  an  overall  assessment  for 
the  27  Member  States.  As  noted  in  this  section, 
information on certain factors is incomplete, which 
prevents  a  fully  consistent  analysis  and  use  of  all 
factors  at  this  stage,  e.g.  concerning  contingent 
liabilities, and the evolution of the benefit ratio.  

risks  well.  Specifically, 

The relationship between the overall classification 
and  the  S2  indicator  is  shown  in  Graph  V.1.1 
which  indicates  that  in  general,  the  synthetic  S2 
indicator  summarises  the  overall  degree  of  long-
term 
the  overall 
assessment  is  different  from  an  assessment  that 
would  be  based  solely  on  the  value  of  the  S2 
indicator  in  the  main  scenario  in  a  few  cases, 
namely: Both Italy and Hungary are deemed to be 
at  medium  long-term  risk  despite  a  low  S2 
indicator due mainly to their very high debt and in 
the case of Italy also to its high tax ratio. Despite a 
very  large  sustainability  gap,  Luxembourg  is 
assessed as being at medium long-term risk due to 
its  low  level  of  debt,  the  large  level  of  assets  and 
the significantly lower S1 indicator which allows it 

85 

 
European Commission 

Sustainability Report - 2009 

Table VI.1.1:  Main factors considered in reaching an overall assessment of the public finance sustainability risks 

S2 indicator

Level of 
debt

Change in the structural 
primary balance

tax ratio

Difference 
between the S1 
and S2 
indicators

Benefit 
ratio

Overall 
assessment

Baseline 

2009

2008 - 2010

%change

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK

medium
low
high
low
medium
low
high
high
high
medium
low
high
high
high
high
low
high
high
medium
medium
medium
high
high
high
medium
low
high

very high
very low
low
low
high
very low
high
very high
medium
high
very high
medium
low
low
very low
very high
high
medium
high
medium
high
very low
low
low
low
medium
high

– –
–

–

–

–
– –

–

–

–
–
– –

–

–

–

–

medium
low
high
low
medium
low
high
high
high
medium
medium
high
high
high
medium
medium
high
high
medium
medium
medium
high
high
high
low
low
high

+

+

–
–
–

–

Note: '-' factor tends to increase the risk to long-term sustainability, '+' factor tends to decrease the risk to long-term sustainability 
Source: Commission services 

points  of  GDP  of  each  other,  the  priorities  are 
different;  PL  needs  to  consolidate  its  public 
finances  once  the  upswing  is  underway  and  the 
time is right, while BE might consider appropriate 
introducing  measures  to  curb  the  projected  high 
increase in age-related expenditure.  

An  overall  assessment  of  risks  to  the  long-term 
sustainability  of  public  finances  is  given  in  the 
following  section  for  the  27  Member  States. 
Moreover, a more detailed assessment per Member 
State  is  given  in  Chapter  VI.  As  noted  in  this 
section, 
is 
incomplete,  which  prevents  a  consistent  analysis 
and use of all factors at this stage, e.g. concerning 
contingent liabilities. 

information  on  certain 

factors 

some  more  time  to  correct  its  gap  than  would  be 
the case with a higher S1. 

the  projected 

Finland  is  assessed  to  be  low  long-term  risk, 
though 
increase  on  age-related 
expenditure is substantial and the fiscal cost of the 
crisis  has  been  large.  However,  the  large  stock  of 
financial  assets  in  the  government’s  portfolio 
(above 100 percent of GDP) provides a cushion to 
in 
the 
absorb 
government accounts. 

crisis-related 

deterioration 

It  should  be  noted  that  countries  with  different 
characteristics can overall face a similar degree of 
risks  to  fiscal  sustainability.  For  example,  the 
projected  cost  of  ageing  in  BE  is  high  while  the 
budgetary position is relatively sound, with a small 
structural  primary  deficit  and  a  very  high  level  of 
government debt. By contrast, PL, which is in the 
same  medium  long-term  risk  category,  has  a 
projected  cost  of  ageing  which  marginally 
improves  its  long-term  sustainability  while  its 
sustainability  difficulties  arise  from  its  weak 
budgetary  position.  Despite  having  the  same 
classification  and  S2  gaps  within  2  percentage 

86 

 
 
 
Overall classification of the long-term risks to the sustainability of public finances 

Chapter VI 

Graph VI.1.1:  Overall risk classification and the sustainability gaps (S2 and S1 in the baseline scenario) 

Assessment

S1

S2

S1

S2

S1

S2

High long-term risk countries

NL

MT

LT

CZ

SK

CY

RO

LV

ES

SI

UK

EL

IE

Medium long-term risk countries

HU

IT

PL

DE

AT

BE

PT

FR

LU

DK

BG

EE

SE

FI

Low long-term risk countries

-2

0

2

4

6

8

10

12

14

16

Source: Commission services. 

87 

 
2.  ASSESSMENT OF SUSTAINABILITY RISKS FOR THE MEMBER 

STATES 

The  budgetary  impact  of  ageing  populations  is  a 
concern for the sustainability of public finances in 
all  EU  Member  States.  There  is  however  a  large 
variation in the degree of risks that they are facing 
and  where  they  mainly  come  from.  This  section 
summarises the different risks that the EU Member 
States  are  facing  with  regard  to  the  long-term 
sustainability  of  the  public  finances.  Overall, 
thirteen  countries  are  assessed  to  be  at  high  risk, 
nine  at  medium  risk  and  five  at  low  risk. 
the  2006 
Compared  with 
Sustainability  Report,  ten  Member  States  are  in  a 
higher  risk  category,  while  two  are  in  lower  risk 
group.  

results  of 

the 

2.1. 

LOW LONG-TERM RISK COUNTRIES 

Bulgaria, Denmark, Estonia, Finland, Sweden have 
in  general  come  furthest  in  coping  with  ageing, 
which implies a strong budgetary position (running 
large  surpluses  prior  to  the  crisis,  reducing  debt 
and/or accumulating assets) and/or comprehensive 
pension  reforms,  sometimes  including  a  shift 
towards  private  funded  pension  schemes,  and 
present therefore a low long-term risk. 

Of  these  countries,  Finland  has  an  above  average 
projected  increase  in  age-related  expenditure  over 
the long-term.  Although, the large stock of public 
financial  assets  provides  a  buffer  against  the 
negative budgetary impacts of the crisis.  

For  Bulgaria,  Denmark,  Estonia  and  Sweden  the 
forecast  increases  in  age-related  expenditure  are 
amongst  the  lowest  in  EU  and  their  budgetary 
positions are either in or close to surplus. This does 
not mean that in these countries there are no risks 
regarding  the  long-term  sustainability  of  public 
finances  however,  but  that  their  social  protection 
systems (pension and healthcare) at present appear 
able  to  deal  with  the  pressures  of  an  ageing 
population  on  current  estimates.  In  particular,  in 
case of Bulgaria and Estonia, a positive impact of 
low  debt  level  and  implemented  pension  reforms 
should  be  seen  in  the  context  of  the  ongoing 
convergence  to  the  levels  observed  in  the  rest  of 
EU. 

88 

2.2.  MEDIUM-RISK COUNTRIES 

The  intermediate  group  of  countries  (Belgium, 
Germany,  France,  Italy,  Luxembourg,  Hungary, 
Austria, Poland and Portugal) consists of Member 
States  with  very  different  characteristics  but  three 
distinct categories can be distinguished: 

Belgium,  Germany,  Austria  are  countries  with  a 
significant  cost  of  ageing  and  where  measures 
might  be  needed  to  curb  these  costs,  but  which 
currently  have 
strong  budgetary 
relatively 
positions.  For  these  countries,  reforms  to  address 
the  rising  cost  of  ageing  are  a  priority  and  these 
can  be  undertaken  without  waiting  for  the  end  of 
the  financial  crisis,  insofar  as  the  reforms  do  not 
adversely affect the recovery. This is also the case 
for  Luxembourg  which  faces  the  highest  increase 
in age-related expenditure of all EU countries, but 
which  is  included  in  the  medium  long-term  risk 
category due to its low level of debt, high stock of 
assets  and  lower  ageing  costs  at  the  beginning  of 
the period as shown by its lower S1 indicator. For 
Belgium,  the  strong  budgetary  position  in  recent 
years  is  counterweighted  by  very  high  levels  of 
debt ratio-to-GDP which is forecast to reach 100% 
by  2010.  Nevertheless,  Belgium  is  assessed  to 
present medium long-term risk because of its track 
record  of  running  consistently  high  primary 
surpluses  over  time  and  reduce  its  debt  when  the 
economy is not in crisis.  

France,  Poland,  and  Portugal  are  countries  that 
need  to  consolidate,  though  to  different  degrees, 
their public finances over the medium-term but for 
which  the  costs  of  ageing  are  relatively  less  of  a 
concern,  usually  as  a  result  of  reforms  made  to 
their  pension  systems.  It  may  be 
the 
government  accounts  improve  when  the  recovery 
comes,  but  where  this  is  not  the  case  budgetary 
consolidation  will  be  necessary  and  should  be 
undertaken as soon as the time is right in order to 
reduce  risks  to  public  finance  sustainability.  In 
Poland’s  and  Portugal’s  cases,  there  is  an  added 
risk in relation to the sharp reduction in the benefit 
ratio. 

that 

For  Italy  and  Hungary  neither  the  budgetary 
position  nor  the  long  term  cost  of  ageing  are 
particularly high. However the initial levels of debt 

 
 
Overall classification of the long-term risks to the sustainability of public finances 

Chapter VI 

give cause for concern. In both Italy and Hungary, 
rapid budgetary consolidation is required to ensure 
a steady reduction of the currently very high level 
of debt, although it will need to be undertaken at a 
time when it does not adversely affect the recovery 
from the economic and financial crisis.  

unsustainability:  Ireland,  Greece,  Spain,  Cyprus, 
Malta, Netherlands, Romania and Slovenia. As not 
all pension and healthcare reforms are neutral with 
respect  to  the  recovery,  care  should  be  taken  to 
consider the effect of any changes undertaken. 

Within  the  high  long-term  risk  countries,  the  case 
of  Cyprus  should  also  be  noted.  Thanks  to 
successful  consolidation  in  the  pre-crisis  years, 
Cyprus  managed  to  significantly  reduce  its  debt 
ratio. Moreover, although the planned increases in 
age-related 
its 
demographic projections are such that the increase 
in  ageing-related  expenditure  will  be  relatively 
contained in the first half of the projection horizon. 

expenditure 

is  very 

large, 

2.3.  HIGH LONG-TERM RISK COUNTRIES  

This  category  of  countries  (Czech  Republic, 
Ireland,  Greece,  Spain,  Cyprus,  Latvia,  Lithuania, 
Malta,  Netherlands,  Romania,  Slovenia,  Slovakia 
and  United  Kingdom)  are  characterised  by  a  very 
significant rise in age-related expenditure over the 
long-term,  underlining  that  measures  aimed  at 
curbing  them  will  prove  necessary.  Of  these, 
Latvia 
the  exception,  where  age-related 
expenditure  is  forecast  to  be  just  1.3  percentage 
points (p.p.) of GDP higher in 2060 compared with 
2010.  For  Greece  and  Slovenia  (as  well  as 
Luxembourg) the increase in these expenditures is 
over 10 p.p. of GDP.  

is 

Conversely, Romania is characterised by very low 
levels of debt which stand at below 20% of GDP, 
while  for  Czech  Republic,  Latvia,  Lithuania, 
Slovenia  and  Slovakia  debt  ratios  stand  at  below 
40%. At the other end of the spectrum, Greece has 
a government dent of nearly 100% of GDP, which 
is  combined  with  one  of  the  highest  increases  in 
age-related  expenditure  grouping  the  whole  EU. 
Latvia,  while  characterised  by  very  low  debt 
levels,  is  forecast  to  have  a  very  large  increase  in 
debt by 2010.  

For  most  of  the  Member  States  in  this  high  long-
term  risk  category  it  will  be  necessary  to  address 
both the long-term costs of ageing through reforms 
to  pension  systems  and  the  weakness  of  the 
budgetary  positions.  For  some  Member  States  the 
deficits  may  return  to  surplus  when  the  recovery 
comes,  but  where  this  is  not  the  case  budgetary 
consolidation  will  be  necessary  and  should  be 
undertaken as soon as the time is right in order to 
reduce risks to public finance sustainability. 

to 

the  reforms 

Conversely, 
the  pension  and 
healthcare  system  which  will  not  adversely  affect 
the  recovery  of  the  Member  States'  economies 
should  be  approached  with  urgency.  This  is 
particularly  the  case  for  countries  where  age 
related  expenditure  is  a  significant  source  of 

89 

 
 
 
 
Chapter VII 
Sustainability assessment per Member State 

 
 
The  Belgian  government  debt  in  2009,  the  base 
year of the analysis, stood at 95.7% of GDP and is 
forecast  to  increase  to  around  100%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  from  0.7%  in  2009  to  0.0%  in  2010. 
Belgian debt is far above both EU average and the 
60%  ceiling  set  by  the  Maastricht  criteria  thus 
poses  risks  for 
term 
sustainability.  

the  medium  and 

long 

1.2.  OVERALL ASSESSMENT 

Belgium appears to be at medium risk with regard 
to  the  long-term  sustainability  of  public  finances. 
The long-term budgetary impact of ageing is above 
the  EU  average,  mainly  as  a  result  of  a  relatively 
high increase in pension expenditure as a share of 
GDP  over  the  coming  decades.  The  budgetary 
position  has  worsened 
in  2009  and  now 
compounds  the  budgetary  impact  of  population 
ageing  on  the  sustainability  gap.  Moreover,  the 
current level of gross debt, which is far above the 
Treaty  reference  value,  adds  to  the  sustainability 
risk. Also, the further deterioration of the structural 
primary balance may widen the sustainability gap.  

Belgium  has  little  scope  to  increase  its  already 
high  tax  burden  thus  focus  should  be  put  on 
decreasing public spending in order to diminish its 
sustainability  gap.  Further  reforming  the  Belgian 
social 
the 
system  would 
sustainability  of  public  finances.  Reforms  should 
however  be  pursued  in  a  manner  that  do  not 
amplify  the  fallouts  of  the  current  economic  and 
financial crisis. 

improve 

security 

1. 

BELGIUM 

1.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure  Belgium  has  a  sustainability  gap  (S2) 
of  5.3%  of  GDP,  which  is  below  the  EU  average 
(6.5%  of  GDP).  This  means  that  to  put  public 
finances  on  a  sustainable  path,  Belgium  should 
improve its structural primary balance in a durable 
manner  by  5.3%  of  GDP.  In  principle,  this 
adjustment  could  take  place  via  an  increase  in 
revenues  or  cuts  in  expenditure.  Alternatively  the 
social  protection  system  (in  particular  public 
pensions, health and long-term care) would have to 
be  reformed  to  decelerate  the  planned  increase  in 
age-related expenditure. 

The  Belgian  sustainability  gap  is  to  a  limited 
extent  the  result  of  the  initial  budgetary  position, 
as  the  required  adjustment  to  stabilise  the  debt 
ratio is slightly positive (0.6% of GDP) but clearly 
below  the  EU  average  (3.3%  of  GDP).    This 
reflects  starting  position  in  terms  of  the  structural 
primary  balance,  which  is  relatively  sounder  than 
in several other Member States. On the other hand, 
the required adjustment given the long-term cost of 
ageing  (4.8%  of  GDP)  is  significantly  above  the 
EU average (3.2% of GDP). The long-term cost of 
ageing is mainly driven by an increase in pension 
expenditure (by 4.5 p.p. in 2060 relative to 2010), 
long-term  care  also 
while  health  care  and 
contribute  less  but  still  significantly  to  the  long-
term cost of ageing (increasing by 1.1 p.p. and 1.3 
p.p. respectively). 

In the 2006 Sustainability Report, the S2 gap was 
1.8%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (3.5  p.p.)  stems  from  the 
deterioration  of  the  initial  budgetary  position  (4.2 
p.p.),  while  component  of  the  long-term  cost  of 
ageing  actually  has 
(-0.5  p.p.).  The 
extension  of  the  projection  period  from  2050  (in 
the  2006  report)  to  2060  had  no  impact  for 
Belgium on these results.  

fallen 

92 

 
 
Sustainability assessment per Member State, Belgium 

Chapter VII 

Table VII.1.1:  Summary table (Belgium) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

10.6
65.9
25.9
67.3
36.2
7.5
1.9

10.0
44.8
7.6
1.5
5.5
1.9

26.5

2008
1.5
89.6

10.8
66.0
26.1
68.0
39.3
10.3
1.0

10.3
46.5
7.7
1.5
5.4
1.9

26.8

2009
0.7
95.7

11.1
65.0
28.2
69.5
46.0
6.8
2.3

10.9
47.5
7.9
1.6
5.2
1.7

27.3

11.3
63.8
30.6
69.8
48.9
6.2
1.9

11.8
48.2
8.1
1.7
5.1
1.5

28.2

11.5
62.4
33.8
69.4
48.9
6.2
1.6

13.0
48.3
8.2
1.8
5.3
1.5

29.7

2010
0.0
100.9

2020

103.1

2025

116.3

11.7
60.9
37.6
69.4
48.8
6.2
1.6

13.9
47.9
8.4
2.0
5.4
1.5

31.1

2030

137.8

12.0
59.2
42.3
69.7
49.5
6.2
1.8

14.6
46.3
8.7
2.5
5.4
1.5

32.7

2040

199.0

12.2
58.6
43.9
69.7
49.4
6.2
1.7

14.7
44.6
8.8
2.8
5.4
1.5

33.3

12.3
57.8
45.8
69.7
49.1
6.2
1.7

14.7
43.2
8.8
2.9
5.5
1.5

33.4

1.7
-8.1
19.9
2.4
13.0
-1.3
-0.2

4.8
-1.6
1.2
1.4
0.0
-0.4

6.9

2050

2060

278.1

372.4

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

eloss age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

5.9
7.7

S1

4.5
6.1

S2

0.7
0.7

IBP

0.5
0.7

S1

6.6
8.4

DR

0.6
0.6

4.5
5.7

LTC

3.5
4.9

1.1
1.1

S2

5.3
7.0

1.3
1.5

IBP

0.6
0.7

-0.3
0.1

S2

LTC

4.8
6.4

-0.2
-0.2

Cost of delay

RPB

0.3
0.5

5.9
7.0

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

5.3

0.5

Pure Ageing

0.2

Higher 
labour 
productivity
-0.6
Constant 
Health 
Status
-0.7

Older 
workers

Total 
Employment

Zero mielation

Interest rate

-0.4

-0.5

2.9

0.2

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.1

0.4

:

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast elowth in 
unit costs

Slow elowth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.3

0.6

0.3

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

1.8

5.3

IBP
4.2

LTC
-0.7

Source:  Commission services. 

-1.0

2008

46.6

Average 2000-
07
47.0

Graph VII.1.1:  Determinants of fiscal sustainability (Belgium) 

BE

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: This chart allows to compare countries on the 
basis of the main variables that are taken into account in the overall 
assessment of sustainability risk per country: S2, S1, the required 
adjustment given the initial budgetary position (IBP), the required 
adjustment given the long-term change in age-related expenditure 
(LTC), the government debt ratio in 2009, the debt ratio at the end of the 
projection horizon (2060) under an unchanged policy assumption, and 
the stock of financial assets. The scale for each variable corresponds to 
the range of data in the EU. Data are in percent of GDP. Countries with 
high sustainability risks have each or most of the variables close to the 
centre of the chart; for countries with low sustainability risks, the area in 
the chart is larger. 
Source: Commission services. 

93 

 
 
 
 
 
budgetary  impact  of  ageing.  Maintaining  high 
primary  surpluses  over  the  medium-term  and 
further  reforming  the  Bulgarian  social  security 
system  would 
long-term 
to 
sustainability of public finances.  

risks 

limit 

the 

The  current  context  of  economic  and  financial 
crisis  entails  that  any  change  exacerbating  its 
effects  should  be  ruled  out,  which  means  that 
Bulgaria  should  keep  a  prudent  fiscal  policy 
stance.  

Graph VII.2.1:  Determinants of fiscal sustainability (Bulgaria) 

BG

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium.  
Source: Commission services. 

2. 

BULGARIA 

2.1.  OVERVIEW OF THE RESULTS 

The  sustainability  analysis  indicates  that  on  the 
basis  of  the  current  budgetary  position  of  2009, 
based  on  the  2009  commissions  services'  spring 
forecast, and the projected increases in age related 
expenditure  Bulgaria  has  a  sustainability  gap  (S2) 
of  0.9%  of  GDP,  which  is  clearly  below  the  EU 
average  (6.5%  of  GDP).  This  means  that  to  put 
public  finances  on  a  sustainable  path,  Bulgaria 
should improve its structural primary balance in a 
durable manner by 0.9% of GDP. In principle, this 
adjustment  could  take  place  via  an  increase  in 
revenues  or  cuts  in  expenditure.  Alternatively  the 
social  protection  system  would  have 
to  be 
reformed to decelerate the planned increase in age-
related expenditure. 

The Bulgarian sustainability gap is partially offset 
by  the  initial  budgetary  position  i.e.  the  required 
adjustment to stabilise the debt ratio is negative (-
0.6%  of  GDP),  clearly  below  the  EU  average 
(3.3% of GDP). The required adjustment given the   
long-term  cost  of  ageing  (1.5%  of  GDP)  is 
significantly  lower  than  the  EU  average  (3.2%  of 
GDP).  The  long-term  cost  of  ageing  is  driven  by 
an  increase  in  public  pension  expenditure  (by  2.2 
p.p. in 2060 relative to 2010) and to a lesser extend 
by  an  increase  of  healthcare  and  long-term  care 
expenditure (by 0.6 p.p. and 0.2 p.p. increasing).  

The  Bulgarian  government  debt  in  2009,  the  base 
year for the analysis, stood at 16.0% of GDP and is 
forecast  to  increase  to  around  17%  of  GDP  in 
2010. The structural primary balance is forecast to 
increase  from  1.1%  of  GDP  in  2009  to  2.4%  of 
GDP in 2010. Bulgaria's debt is among the lowest 
among  EU  Member  States  and  way  below  the 
Maastricht limit. 

2.2.  OVERALL ASSESSMENT 

Bulgaria  appears  to  be  at  low  risk  with  regard  to 
the long-term sustainability of public finances. The 
budgetary position in 2009, with a large structural 
primary  surplus,  contributes  significantly  to  debt 
long-term 
reduction  before  considering 

the 

94 

 
 
 
 
 
Sustainability assessment per Member State, Bulgaria 

Chapter VII 

Change      

2007 - 2060

-2.2
-15.5
38.7
2.4
3.6
-2.2
-5.1

3.0
-8.8
0.7
0.2
-0.2
0.0

3.7

Table VII.2.1:  Summary table (Bulgaria) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

7.7
69.3
24.9
66.8
46.6
6.9
5.9

8.3
44.4
4.7
0.2
3.3
0.1

16.6

2008
1.0
14.1

7.6
69.1
25.3
67.8
46.4
7.8
3.5

9.1
49.9
4.8
0.2
2.9
0.1

17.1

2009
1.1
16.0

7.4
67.0
28.2
69.9
47.4
4.7
3.0

8.6
47.1
4.9
0.2
2.7
0.1

16.5

2010
2.4
17.3

7.2
65.4
31.1
70.3
48.2
4.7
2.4

8.4
44.3
5.0
0.2
2.8
0.1

16.5

2020

3.4

7.0
64.7
33.7
69.6
48.8
4.7
2.0

8.4
42.2
5.0
0.2
2.9
0.1

16.7

2025

-3.6

6.8
64.2
36.3
69.0
49.8
4.7
1.7

8.6
40.3
5.1
0.2
2.9
0.1

16.9

2030

-9.9

6.3
61.3
43.6
68.0
49.0
4.7
1.4

9.5
37.3
5.4
0.3
2.7
0.1

17.9

2040

-17.2

5.9
56.4
55.4
67.9
47.6
4.7
0.3

10.8
35.6
5.5
0.3
2.9
0.1

19.6

2050

-11.9

5.5
53.8
63.5
69.3
50.2
4.7
0.8

11.3
35.6
5.4
0.4
3.0
0.1

20.2

2060

9.8

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

eloss age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

3.2
2.4

S1

-0.6
-1.2

S2

0.0
0.0

IBP

-0.7
-0.7

S1

3.2
2.4

DR

-0.5
-0.5

2.2
1.5

LTC

0.6
0.0

0.6
0.6

S2

0.9
0.3

0.2
0.2

IBP

-0.6
-0.6

0.2
0.0

S2

LTC

1.5
0.9

-0.2
-0.3

Cost of delay

RPB

0.1
0.0

2.3
1.9

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

0.9

0.3

Pure Ageing

0.0

Higher 
labour 
productivity
-0.2
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero mielation

Interest rate

0.0

-0.2

0.3

-0.3

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

1.9

0.6

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast elowth in 
unit costs

Slow elowth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.1

0.1

0.0

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

:

0.6

IBP
:

LTC
:

Source: Commission services. 

-0.1

2008

33.9

Average 2000-
07
33.2

95 

 
 
 
 
 
3. 

THE CZECH REPUBLIC 

3.1.  OVERVIEW OF THE RESULTS 

in  age 

the  projected 

increases 
the  Czech  Republic 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
related 
and 
expenditure, 
a 
has 
sustainability  gap  (S2)  of  7.4%  of  GDP,  which  is 
above the EU average (6.5% of GDP).  This means 
that  to  put  public  finances  on  a  sustainable  path, 
the  Czech  Republic  should  improve  its  structural 
primary  balance  in  a  durable  manner  by  7.4%  of 
GDP. In principle, this adjustment could take place 
via  both  an  increase  in  revenues  and  cuts  in 
expenditure.  Alternatively,  the  social  protection 
system  (in  particular  public  pensions  and  health 
care) would have to be reformed to decelerate the 
projected increase in age-related expenditure. 

In  parallel, 

The  Czech  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(3.7%  of  GDP),  slightly  above  the  EU  average 
(3.3%  of  GDP). 
required 
adjustment  given  the  long-term  cost  of  ageing 
(3.7% of GDP) is somewhat above the EU average 
(3.2%  of  GDP).  The  long-term  cost  of  ageing  is 
mainly  driven  by  an 
in  pension 
expenditure (by 4.0 p.p. in 2060 relative to 2010), 
while health care also contributes to the long-term 
cost of ageing (increasing by 2.0 p.p.). 

increase 

the 

In the 2006 Sustainability Report, the S2 gap was 
5.5%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (2.0  p.p.)  stems  from  the 
deterioration  of  the  initial  budgetary  position  (3.2 
p.p.), while the component of the long-term cost of 
ageing  has  actually  decreased  (-1.9  p.p.)  due 
mainly  to  reforms  to  the  pension  and  health  care 
systems.  The  extension  of  the  projection  period 
from  2050  (in  the  2006  report)  to  2060  increases 
the sustainability gap by 0.7 p.p. 

The Czech government debt in 2009, the base year 
of  the  analysis,  stood  at  33.7%  of  GDP  and  is 
forecast  to  increase  to  around  37.9%  of  GDP  in 
2010. The structural primary balance is forecast to 
improve  slightly  from  -2.9%  in  2009  to  -2.6%  in 

96 

2010.  Czech  debt  is  both  below  the  EU  average 
and the 60% ceiling set by the Maastricht criteria, 
however the continuing structural primary deficits 
may  widen  the  sustainability  gap  of  its  public 
finances. 

3.2.  OVERALL ASSESSMENT 

The Czech Republic appears to be at high risk with 
regard  to  the  long-term  sustainability  of  public 
finances.  The  long-term  budgetary  impact  of 
ageing  is  above  the  EU  average  according  to  the 
projections  made  in  2009.  The  budgetary  position 
in  2009  compounds  the  budgetary  impact  of 
population ageing on the sustainability gap.  

Improving  the  primary  balance  over  the  medium 
term  and  further  reforms  to  the  social  security 
system  would  contribute  to  reducing  risks  to  the 
long-term 
finances. 
sustainability  of  public 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis  

Graph VII.3.1:  Determinants of fiscal sustainability (The Czech 

Republic) 

CZ

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium.  
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, The Czech Republic 

Chapter VII 

Table VII.3.1:  Summary table (The Czech Republic) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

10.3
71.2
20.2
70.0
48.9
5.3
3.9

7.8
45.2
6.2
0.2
3.5
0.1

17.9

2008
-2.3
29.8

10.4
70.5
21.8
71.0
53.0
7.4
2.9

7.1
41.6
6.4
0.2
3.2
0.1

17.0

2009
-2.9
33.7

10.5
67.5
26.5
73.5
56.8
4.5
3.0

6.9
38.7
6.7
0.3
3.0
0.1

16.9

2010
-2.6
37.9

10.5
65.1
31.1
73.9
58.1
4.5
2.5

6.9
36.8
6.9
0.3
3.0
0.1

17.2

2020

65.9

10.5
64.5
33.8
72.9
58.5
4.5
1.6

7.0
35.7
7.1
0.3
3.1
0.1

17.7

2025

87.4

10.4
64.3
35.7
72.5
60.8
4.5
1.4

7.1
35.4
7.4
0.4
3.1
0.1

18.1

2030

114.9

10.2
61.6
42.7
72.3
63.4
4.5
0.9

8.4
36.5
7.8
0.5
2.9
0.1

19.8

2040

192.4

9.9
56.5
54.8
73.5
66.8
4.5
0.7

10.2
37.6
8.1
0.5
3.0
0.1

22.0

9.5
54.4
61.4
73.5
67.5
4.5
1.1

11.0
37.6
8.4
0.7
3.2
0.1

23.4

-0.8
-16.9
41.2
3.6
18.6
-0.8
-2.8

3.3
-7.5
2.2
0.4
-0.3
0.0

5.5

2050

2060

317.0

486.7

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

eloss age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

6.3
6.3

S1

5.3
5.3

S2

0.0
0.0

IBP

3.6
3.6

S1

6.3
6.3

DR

-0.3
-0.3

4.0
4.0

LTC

1.9
2.0

2.0
1.9

S2

7.4
7.5

0.4
0.4

IBP

3.7
3.8

0.0
0.0

S2

LTC

3.7
3.7

-0.3
-0.3

Cost of delay

RPB

0.6
0.6

4.6
4.6

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

7.4

0.5

Pure Ageing

0.1

Higher 
labour 
productivity
-0.1
Constant 
Health 
Status
-0.7

Older 
workers

Total 
Employment

Zero mielation

Interest rate

0.5

0.5

1.1

-0.6

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.4

0.4

1.1

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast elowth in 
unit costs

Slow elowth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.0

0.1

0.1

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

5.5

6.7

IBP
3.2

LTC
-1.9

Source:  Commission services. 

-0.3

2008

36.7

Average 2000-
07
35.9

97 

 
 
 
 
 
4.  DENMARK 

4.1.  OVERVIEW OF THE RESULTS 

4.2.  OVERALL ASSESSMENT 

Denmark  appears  to  be  at  low  risk  with  regard  to 
the long-term sustainability of public finances. The 
long-term budgetary impact of the cost of ageing is 
lower  than  on  average  in  the  EU,  notably  due  to 
the 
the 
budgetary  position  with  a  structural  surplus  will 
further  limit  risks  to  the  sustainability  of  public 
finances. 

reform.  Moreover, 

recent  pension 

High  primary  surpluses  over  the  medium  term 
would contribute to reducing risks to the long-term 
sustainability  of  public  finances.  Reforms  should 
however  be  pursued  in  a  manner  that  do  not 
amplify  the  fallouts  of  the  current  economic  and 
financial crisis. 

In  addition,  Denmark  gave  guarantees  to  its 
banking  sector  which  if  actually  granted,  could 
threaten 
the  sustainability  of  Danish  public 
finances, due to their magnitude.  

Graph VII.4.1:  Determinants of fiscal sustainability (Denmark) 

DK

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure, Denmark has a negative sustainability 
gap (S2) of -0.2% of GDP, which is clearly below 
the EU average (6.5% of GDP).   

the  projected 

increases 

in  age 

i.e. 

While the Danish sustainability gap is negative, the 
required  adjustment  given  the  long-term  cost  of 
ageing is positive (1.4% of GDP), which is below 
the  EU  average  (3.3%  of  GDP).  In  parallel,  the 
initial  budgetary  position, 
required 
adjustment to stabilise the debt ratio is negative (-
1.6% of GDP) clearly below the EU average (3.2% 
of  GDP).  The  increase  in  the  long-term  cost  of 
ageing  is  mainly  driven  by  long-term  care  and 
health care expenditure (increasing by 1.5 p.p. and 
0.9  p.p.  respectively  in  2060  relative  to  2010), 
while  the  ratio  of  pension  expenditure  to  GDP 
decreases by 0.2 p.p.  

the 

the  deterioration  of 

In the 2006 Sustainability Report, the S2 gap was 
negative (-2.2% of GDP). The difference between 
that  report  and  the  current  results  (2.0  p.p.)  stems 
mainly  from 
initial 
budgetary position (4.5 p.p.), while the component 
of  the  long-term  cost  of  ageing  has  decreased  by 
2.1  p.p.  The  extension  of  the  projection  period 
from  2050  (in  the  2006  report)  to  2060  decreases 
the sustainability gap by 0.4 p.p. 

the 

The  Danish  government  debt  in  2009,  the  base 
year of the analysis, stood at 32.5% of GDP and is 
forecast  to  increase  to  around  33%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  from  2.8%  in  2009  to  1.2%  in  2010. 
Danish debt is both below the EU average and the 
60% ceiling set by the Maastricht criteria.  

98 

 
 
 
 
Sustainability assessment per Member State, Denmark 

Chapter VII 

Change      

2007 - 2060

0.5
-7.4
19.5
0.6
8.1
-0.6
-0.1

0.1
-1.6
1.0
1.5
0.2
-0.2

2.6

Table VII.4.1:  Summary table (Denmark) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

5.4
66.1
23.2
80.3
61.3
3.8
1.7

9.1
39.4
5.9
1.7
7.1
1.0

24.8

2008
5.6
33.3

5.5
65.5
25.0
79.8
60.3
6.6
0.7

9.4
39.4
6.0
1.8
7.2
0.8

25.2

2009
2.8
32.5

5.6
64.1
29.1
79.8
61.1
3.2
1.7

10.2
38.9
6.2
1.9
7.4
0.8

26.5

2010
1.2
33.7

5.7
63.1
31.8
79.6
62.6
3.2
1.6

10.6
38.3
6.4
2.1
7.4
0.8

27.4

2020

12.2

5.7
62.0
34.5
79.6
64.4
3.2
1.8

10.5
38.0
6.6
2.3
7.3
0.8

27.5

2025

10.3

5.8
60.3
37.8
79.6
64.0
3.2
1.5

10.6
38.3
6.7
2.6
7.4
0.8

28.1

2030

11.3

5.9
58.2
42.7
80.6
66.6
3.2
1.7

10.4
37.7
6.8
3.0
7.5
0.8

28.6

2040

17.4

5.9
59.2
41.3
81.0
70.3
3.2
1.9

9.6
37.5
6.9
3.2
7.4
0.8

27.9

2050

21.3

5.9
58.7
42.7
80.8
69.3
3.2
1.6

9.2
37.8
6.9
3.2
7.2
0.8

27.4

2060

18.3

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

1.0
0.8

S1

-0.6
-0.8

S2

1.2
1.2

IBP

-1.9
-1.9

S1

2.2
2.0

DR

-0.5
-0.5

-0.2
-0.3

LTC

1.8
1.6

0.9
0.8

S2

-0.2
-0.4

1.5
1.4

IBP

-1.6
-1.6

0.1
0.0

S2

LTC

1.4
1.2

-1.1
-1.1

Cost of delay

RPB

0.0
0.0

1.9
1.9

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

-0.2

0.3

Pure Ageing

0.2

Higher 
labour 
productivity
0.0
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.4

1.2

0.3

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.1

0.4

:

0.6

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.2

-0.2

0.4

0.2

0.4

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

-2.2

0.1

IBP
4.5

LTC
-2.1

Source:  Commission services. 

-1.2

2008

49.4

Average 2000-
07
50.0

99 

 
 
 
 
 
5.  GERMANY 

5.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure Germany has a sustainability gap (S2) 
of 4.2% of GDP, which is significantly below the 
EU average (6.5% of GDP). This means that to put 
public  finances  on  a  sustainable  path,  Germany 
should improve its structural primary balance in a 
durable manner by 4.2% of GDP. In principle, this 
adjustment  could  take  place  via  an  increase  in 
in  expenditure.  The  new 
revenues  or  cuts 
budgetary 
the  German 
anchored 
Constitution,  setting  a  0.35%  of  GDP  ceiling  for 
the  federal  budget  in  structural  terms  as  of  2016 
and  prescribing  structurally  balanced  budgets  for 
the  Länder  governments  as  of  2020,  will  be  a 
cornerstone  of  future  consolidation  efforts.  In 
parallel, the social protection system would have to 
be  reformed  further  and  the  achievements  of  the 
past  reforms  would  have  to  be  preserved.  In 
particular,  recent  deviation  from  the  pension 
adjustment  formula  resulting  in higher outlays  for 
pension  benefits  in  2008  and  2009  would  have  to 
be reversed as envisaged as of 2010. 

rule 

in 

is 

sustainability  gap 

slightly 
The  German 
compounded  by  the  initial  budgetary  position,  i.e. 
the required adjustment to stabilise the debt ratio is 
positive  (0.9%  of  GDP),  clearly  below  the  EU 
average  (3.3%  of  GDP).  In  parallel,  the  required 
adjustment  given  the  long-term  cost  of  ageing 
(3.3% of GDP) is close to the EU average (3.2% of 
GDP).  The  long-term  cost  of  ageing  is  mainly 
driven  by  an  increase  in  pension  expenditure  (by 
2.6 p.p. in 2060 relative to 2010), while health care 
and long-term care contribute to the long-term cost 
of  ageing  by  a  lesser  but  still  significant  amount 
(increasing  by  1.6  p.p.  and  1.4  p.p.  of  GDP 
respectively). 

In the 2006 Sustainability Report, the S2 gap was 
4.4%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (-0.2  p.p.)  stems  from  the 
improvement of the initial budgetary position (0.5 
p.p.), while the component of the long-term cost of 

100 

ageing  has  increased  slightly  (0.1  p.p.).  The 
extension  of  the  projection  period  from  2050  (in 
the 2006 report) increases the sustainability gap by 
0.2 p.p.  

The  German  government  debt  in  2009,  the  base 
year of the analysis, stood at 73.4% of GDP and is 
forecast  to  increase  to  around  78%  of  GDP  in 
2010.  The  structural  primary  balance  is  projected 
to  decrease  from  0.6%  in  2009  to  -0.9%  in  2010. 
German debt is above both the EU average and the 
60%  ceiling  set  by  the  Maastricht  criteria  which 
poses  risks  for  the  medium  and  long  term.  The 
deterioration of its structural primary balance may 
also pose some risk for the long-term sustainability 
of its public finances. 

5.2.  OVERALL ASSESSMENT 

Germany appears to be at medium risk with regard 
to  the  long-term  sustainability  of  public  finances. 
The long-term budgetary impact of ageing is close 
to  the  EU  average.  The  budgetary  position  has 
worsened 
the 
budgetary  impact  of  population  ageing  on  the 
sustainability  gap.  Moreover  the  current  level  of 
gross debt is above the Treaty reference value and 
on  a  rising  trend.  The  decrease  of  the  structural 
primary balance may widen the sustainability gap.  

in  2009  and  now  compounds 

Improving  primary  surpluses  over  the  medium 
term, preserving the achievements of past pension 
reforms  and  further  reforms  to  the  social  security 
system aimed at curbing the increase in age-related 
expenditures would contribute to reducing risks to 
the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

 
 
 
Sustainability assessment per Member State, Germany 

Chapter VII 

Table VII.5.1:  Summary table (Germany) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

82.3
66.3
29.9
76.2
57.3
8.4
0.9

10.4
51.4
7.4
0.9
3.9
0.9

23.6

2008
1.6
65.9

82.1
66.0
31.2
77.3
60.3
10.4
0.8

10.2
50.4
7.6
1.0
3.7
0.9

23.3

2009
0.6
73.4

81.9
65.9
32.2
78.7
67.6
7.1
1.9

10.1
49.7
7.9
1.1
3.4
0.8

23.2

2010
-0.9
78.7

81.5
64.6
35.3
79.1
69.9
6.2
1.5

10.5
49.7
8.1
1.2
3.2
0.6

23.6

2020

77.7

80.9
62.6
39.5
78.8
69.6
6.2
0.9

11.0
47.8
8.3
1.3
3.2
0.6

24.5

2025

86.8

80.2
59.7
46.2
79.3
70.5
6.2
1.3

11.5
45.9
8.5
1.4
3.3
0.6

25.4

2030

102.5

77.8
56.7
54.7
80.2
74.7
6.2
1.1

12.1
42.9
9.0
1.8
3.4
0.6

26.9

2040

152.1

74.5
56.2
56.4
79.7
73.9
6.2
1.0

12.3
42.5
9.2
2.2
3.4
0.6

27.8

70.8
55.0
59.1
79.8
73.9
6.2
1.0

12.8
42.5
9.2
2.4
3.5
0.6

28.4

-11.6
-11.3
29.2
3.6
16.5
-2.2
0.1

2.3
-8.9
1.8
1.4
-0.4
-0.3

4.8

2050

2060

222.1

318.9

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

5.1
6.7

S1

3.1
4.7

S2

0.0
0.0

IBP

0.8
1.0

S1

5.1
6.7

DR

0.2
0.2

2.5
3.9

LTC

2.1
3.6

1.6
1.5

S2

4.2
5.8

1.4
1.5

IBP

0.9
1.0

-0.4
-0.3

S2

LTC

3.3
4.8

-0.2
-0.2

Cost of delay

RPB

0.4
0.6

5.0
5.7

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

4.2

0.4

Pure Ageing

0.1

Higher 
labour 
productivity
0.1
Constant 
Health 
Status
-0.6

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.1

-0.2

1.9

0.1

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

-0.1

0.4

:

0.6

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.2

0.4

0.2

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

4.4

4.0

IBP
-0.5

LTC
0.1

Source:  Commission services. 

-0.9

2008

40.7

Average 2000-
07
41.1

Graph VII.5.1:  Determinants of fiscal sustainability (Germany) 

DE

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

101 

 
 
 
 
 
6. 

ESTONIA 

6.1.  OVERVIEW OF THE RESULTS 

Despite  the  deterioration  of  its  structural  primary 
balance, Estonia has sustainable public finances.  

6.2.  OVERALL ASSESSMENT 

Estonia appears to be at low risk with regard to the   
long-term  sustainability  of  public  finances.  The 
long-term budgetary impact of ageing is among the 
lowest in the EU, mainly due to the reforms of the 
pension  system,  and  social  protection  system  at 
present  appears  able  to  deal  with  the  pressures  of 
an  ageing  population  based  on  current  estimates. 
However,  the  adjustment  needed  due  to  the 
structural  primary  deficit  in  2009  outweighs  the 
budgetary 
impact  of  population  ageing  and 
increases  the  sustainability  gap.  This  assessment 
should  be  seen  in  the  context  of  the  ongoing  cost 
convergence,  as  well  as  an  initially  low  level  of 
total  age-related  expenditure  compared  to  the  EU 
average level. 

Improving  the  primary  balance  over  the  medium 
term  would  contribute  to  reducing  risks  to  the 
long-term 
finances. 
sustainability  of  public 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.6.1:  Determinants of fiscal sustainability (Estonia) 

EE

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary of 2009, position based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Estonia has a sustainability gap (S2) 
of  1.0%  of  GDP,  which  is  clearly  below  the  EU 
average  (6.5%  of  GDP).    This  means  that  to  put 
public  finances  on  a  sustainable  path,  Estonia 
should improve its structural primary balance in a 
durable manner by 1.0% of GDP. In principle, this 
adjustment could take place via both an increase in 
revenues and cuts in expenditure.  

The Estonian sustainability gap is compounded by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(1.0%  of  GDP),  below  the  EU  average  (3.2%  of 
GDP).  The  sustainability  gap  is  mitigated  by  the 
required  adjustment  given  the  long-term  cost  of 
ageing  is  negative  (-0.1%  of  GDP)  and  clearly 
lower  than  the  EU  average  (3.3%  of  GDP).  The 
long-term cost of ageing are driven by an increase 
in  health  care  expenditure  (by  1.1  p.p.  in  2060 
relative to 2010), while long-term care expenditure 
contribute  less  to  the  long-term  cost  of  ageing 
(increasing by 0.1 p.p.). At the same time, the GDP 
share of pension expenditure is expected to fall by 
1.6 p.p. 

In the 2006 Sustainability Report, the S2 gap was  
-3.4% of GDP. The difference between that report 
and the current results (4.4 p.p.) stems mainly from 
the  deterioration  of  the  initial  budgetary  position 
(2.9  p.p.),  while  the  component  of  the  long-term 
cost  of  ageing  has  increased  by  1.5  p.p.  The 
extension  of  the  projection  period  from  2050  (in 
the 2006 report) to 2060 had no impact for Estonia 
on these results. 

The  Estonian  government  debt  in  2009,  the  base 
year of the analysis, stood at 6.8% of GDP and is 
forecast to increase to around 8% of GDP in 2010. 
The  structural  primary  balance  is  forecast  to 
increase  from  -0.6%  in  2009  to  -1.4%  in  2010. 
Estonian  debt  is  well  below  the  EU  average  and 
the  60%  ceiling  set  by  the  Maastricht  criteria. 

102 

 
 
 
Sustainability assessment per Member State, Estonia 

Chapter VII 

Change      

2007 - 2060

-0.2
-12.7
30.5
1.6
1.7
-1.2
-3.6

-0.7
-10.6
1.2
0.1
-0.2
0.0

0.4

Table VII.6.1:  Summary table (Estonia) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

1.3
68.0
25.1
72.9
62.4
4.7
4.8

5.6
26.5
4.9
0.1
3.7
0.1

14.3

2008
-3.9
4.8

1.3
67.9
25.0
74.4
63.3
14.1
1.0

6.4
33.7
5.1
0.1
3.1
0.0

14.8

2009
-0.6
6.8

1.3
66.1
26.7
75.4
60.6
3.5
3.2

6.2
31.8
5.2
0.1
3.0
0.0

14.5

2010
-1.4
7.8

1.3
64.3
29.2
75.4
62.8
3.5
2.6

5.9
29.2
5.3
0.1
3.3
0.0

14.6

2020

19.2

1.3
63.5
31.9
74.6
63.7
3.5
2.3

5.8
26.9
5.4
0.1
3.5
0.0

14.7

2025

23.7

1.3
63.2
34.4
74.3
64.6
3.5
2.2

5.6
24.8
5.5
0.1
3.4
0.0

14.6

2030

28.5

1.2
62.1
39.0
74.1
64.5
3.5
1.0

5.4
21.9
5.8
0.1
3.1
0.0

14.4

2040

40.1

1.2
58.1
47.2
73.7
61.9
3.5
0.6

5.3
18.5
6.0
0.1
3.2
0.0

14.7

2050

57.4

1.1
55.3
55.6
74.5
64.1
3.5
1.2

4.9
15.8
6.1
0.1
3.5
0.0

14.7

2060

81.4

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

-0.1
-0.5

S1

0.3
0.1

S2

0.0
0.0

IBP

1.0
1.1

S1

-0.1
-0.5

DR

-0.6
-0.6

-1.6
-2.0

LTC

-0.2
-0.5

1.1
1.0

S2

1.0
0.7

0.1
0.1

IBP

1.1
1.2

0.3
0.4

S2

LTC

-0.1
-0.5

-0.3
-0.4

Cost of delay

RPB

0.1
0.1

0.3
0.1

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

1.0

0.4

Pure Ageing

0.0

Higher 
labour 
productivity
-0.1
Constant 
Health 
Status
-0.6

Older 
workers

Total 
Employment

Zero migration

Interest rate

0.0

0.0

0.3

0.1

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

1.3

0.8

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.0

0.1

0.0

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

-3.4

1.0

IBP
2.9

LTC
1.5

Source:  Commission services. 

-0.1

2008

32.8

Average 2000-
07
31.2

103 

 
 
 
 
7. 

IRELAND 

7.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Ireland  has  a  sustainability  gap  (S2) 
of  15.0%  of  GDP,  which  is  clearly  above  the  EU 
average  (6.5%  of  GDP).    This  means  that  to  put 
public  finances  on  a  sustainable  path,  Ireland 
should improve its structural primary balance in a 
durable  manner  by  15.0%  of  GDP.  In  principle, 
this  adjustment  could  take  place  via  both  an 
increase  in  revenues  and  cuts  in  expenditure. 
Additionally,  the  social  protection  system  (in 
particular  public  pensions  and  health  care)  would 
have  to  be  reformed  to  decelerate  the  projected 
increase in age-related expenditure. 

i.e. 

the 

the 

In  parallel, 

The Irish sustainability gap is compounded by the 
required 
initial  budgetary  position, 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(8.3%  of  GDP),  clearly  above  the  EU  average 
(3.3%  of  GDP). 
required 
adjustment  given  the  long-term  cost  of  ageing 
(6.7%  of  GDP)  is  again  clearly  above  the  EU 
average  (3.2%  of  GDP).  The  long-term  cost  of 
ageing is mainly driven by an increase in pension 
expenditure (by 5.9 p.p. in 2060 relative to 2010), 
while  health  care  and 
long-term  care  also 
contribute  less  but  still  significantly  to  the  long-
term cost of ageing (increasing by 1.7 p.p. and 1.3 
p.p. of GDP respectively). 

In the 2006 Sustainability Report, the S2 gap was 
2.9%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (12.1  p.p.)  stems  from  the 
deterioration of the initial budgetary position (11.6 
p.p.), while the component of the long-term cost of 
ageing has decreased by 0.7 p.p. The extension of 
the  projection  period  from  2050  (in  the  2006 
report) to 2060 increases the sustainability gap by 
1.2 p.p. 

The  Irish  government  debt  in  2009,  the  base  year 
of  the  analysis,  stood  at  to  61.2%  of  GDP  and  is 
forecast  to  increase  to  around  80%  of  GDP  in 
2010. The structural primary balance is forecast to 

104 

deteriorate  from  -7.6%  %  in  2009  to  -9.0%  in 
2010. Irish debt is still both below the EU average 
but  already  above  the  60%  ceiling  set  by  the 
Maastricht  criteria.  The  widening  of  already  large 
structural primary deficits will aggravate the stance 
of Irish public finances. 

7.2.  OVERALL ASSESSMENT 

Ireland appears to be at high risk with regard to the 
long-term  sustainability  of  public  finances.  The 
long-term  budgetary  impact  of  ageing  is  well 
above  the  EU  average,  mainly  as  a  result  of  a 
relatively  high  projected 
in  pension 
the  coming  decades.  The 
expenditure  over 
budgetary  position 
the 
budgetary  impact  of  population  ageing  on  the 
sustainability gap. 

in  2009  compounds 

increase 

Improving  the  primary  balance  over  the  medium 
term  and  further  reforms  to  the  social  security 
system would contribute to reducing the high risks 
to  the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

In  addition,  the  extent  of  guarantees  on  bank 
liabilities granted should be considered a potential 
risk factor. 

Graph VII.7.1:  Determinants of fiscal sustainability (Ireland) 

IE

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Ireland 

Chapter VII 

Table VII.7.1:  Summary table (Ireland) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

4.3
68.6
16.1
72.5
55.1
4.6
3.7

5.2
27.3
5.8
0.8
4.5
0.8

17.2

2008
-6.4
43.2

4.6
68.0
16.7
73.9
57.1
15.7
-1.2

5.5
28.5
5.9
0.9
4.4
0.9

17.5

2009
-7.6
61.2

5.1
66.6
18.4
75.2
62.3
5.1
3.4

5.9
29.1
6.0
0.9
4.4
0.9

18.0

2010
-9.0
79.7

5.4
65.6
20.2
75.7
65.6
5.1
2.9

6.4
29.7
6.1
0.9
4.4
0.9

18.7

5.7
65.2
22.3
75.7
66.6
5.1
2.6

7.0
30.0
6.3
1.0
4.4
0.9

19.5

5.9
65.1
24.6
75.7
68.1
5.1
2.3

7.5
30.4
6.5
1.1
4.4
0.9

20.3

2020

154.7

2025

203.8

2030

260.8

6.2
63.3
30.6
76.0
68.6
5.1
1.8

8.7
31.0
6.9
1.4
4.0
0.8

21.9

2040

403.8

6.5
58.8
40.4
76.3
68.3
5.1
1.6

10.5
31.5
7.3
1.8
4.1
0.8

24.5

6.8
57.8
43.6
76.3
69.1
5.1
2.0

11.3
31.6
7.6
2.2
4.2
0.8

26.2

2.4
-10.7
27.4
3.9
14.0
0.5
-1.7

6.1
4.3
1.8
1.3
-0.3
0.1

8.9

2050

2060

606.3

848.5

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

8.7
14.9

S1

12.1
16.7

S2

0.0
0.0

IBP

8.2
8.6

S1

8.7
14.9

DR

0.2
0.2

5.9
10.1

LTC

3.7
7.9

1.7
1.5

S2

15.0
20.6

1.3
2.2

IBP

8.3
8.5

-0.2
1.1

S2

LTC

6.7
12.1

-0.1
-0.2

Cost of delay

0.7
1.1

RPB

7.2
11.1

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

15.0

0.4

Pure Ageing

0.2

Higher 
labour 
productivity
0.0
Constant 
Health 
Status
-0.6

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

0.1

1.8

-0.7

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.4

:

0.8

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.2

0.4

0.2

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

2.9

13.8

IBP
11.6

LTC
-0.7

Source:  Commission services. 

-1.0

2008

30.0

Average 2000-
07
31.7

105 

 
 
 
 
 
 
 
 
8.  GREECE 

8.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,   Greece has  a  sustainability  gap  (S2) 
of  14.1%  of  GDP,  which  is  clearly  above  the  EU 
average  (6.5%  of  GDP).    This  means  that  to  put 
public  finances  on  a  sustainable  path,  Greece 
should improve its structural primary balance in a 
durable  manner  by  14.1%  of  GDP.  In  principle, 
this  adjustment  could  take  place  via  both  an 
increase  in  revenues  and  cuts  in  expenditure. 
Additionally,  the  social  protection  system  (in 
particular  public  pensions)  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

The  Greek  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(2.6%  of  GDP),  below  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (11.5%  of  GDP)  is 
clearly above the EU average (3.2% of GDP). The 
long-term  cost  of  ageing  is  mainly  driven  by  an 
increase  in  pension  expenditure  (by  12.5  p.p.  of 
GDP in 2060 relative to 2010). 

In the 2006 Sustainability Report, the S2 gap was 
3.0%  of  GDP (33).  The  difference  between  that 
report  and  the  current  results  (11.0  p.p.)  stems 
mainly  from  the  increase  in  the  long  term  cost  of 
ageing  (9.9  p.p.),  while  the  deterioration  of  the 
initial  budgetary  position  has  a  clearly  smaller 
impact  (0.7).  The  extension  of  the  projection 
period  from  2050  (in  the  2006  report)  to  2060 
increases the sustainability gap by 0.5 p.p. 

Greek  debt  is  far  above  both  the  EU  average  and 
the 60% ceiling set by the Maastricht criteria. The 
Greek  government  debt  in  2009,  the  base  year  of 
the  analysis,  stood  at  103.3%  of  GDP  and  is 

(33)  In 2006 no pension projections were available for Greece, 
and  the  rise  in  age-related  expenditure  was  therefore 
underestimated. 

106 

forecast  to  increase  to  around  108%  of  GDP  in 
2010. The structural primary balance is forecast to 
improve from -0.9% in 2009 to 0.3% in 2010.  

8.2.  OVERALL ASSESSMENT 

Greece  appears  to  be  at  high  long-term  risk  with 
regard  to  the  long-term  sustainability  of  public 
finances.  The  long-term  budgetary  impact  of 
ageing is well above the EU average, mainly as a 
result  of  a  relatively  high  increase  in  pension 
expenditure  as  a  share  of  GDP  over  the  coming 
decades.  The  budgetary  position 
in  2009 
compounds  the  budgetary  impact  of  population 
ageing on the sustainability gap.  

Improving  primary  surpluses  over  the  medium 
term and especially a further reform of the pension 
system aimed at curbing the substantial increase in 
age-related  expenditures  would  contribute 
to 
reducing  risks  to  the  long-term  sustainability  of 
public  finances.  Reforms  should  however  be 
pursued  in  a  manner  that  do  not  amplify  the 
fallouts  of  the  current  economic  and  financial 
crisis. 

Graph VII.8.1:  Determinants of fiscal sustainability (Greece) 

EL

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
                                                           
 
Sustainability assessment per Member State, Greece 

Chapter VII 

Table VII.8.1:  Summary table (Greece) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

11.2
67.1
27.6
67.1
44.3
8.3
3.5

11.7
73.1
5.0
1.4
3.7
0.3

22.1

2008
-2.1
97.6

11.3
66.8
28.2
68.2
44.8
9.7
2.0

11.6
72.2
5.1
1.5
3.5
0.3

21.9

11.5
65.5
30.6
69.3
47.1
7.1
2.7

12.2
74.7
5.3
1.7
3.3
0.3

22.7

11.6
64.5
32.8
69.4
48.7
6.2
2.9

13.2
77.9
5.4
1.8
3.3
0.2

23.9

11.6
63.8
35.4
68.8
50.4
6.2
1.8

14.8
81.4
5.5
1.9
3.4
0.2

25.9

2009
-0.9
103.3

2010
0.3
107.9

2020

133.7

2025

160.3

11.6
62.8
38.5
68.3
50.9
6.2
1.3

17.1
85.6
5.7
2.0
3.4
0.2

28.5

2030

205.9

11.6
58.9
48.2
68.4
51.5
6.2
1.0

21.4
86.9
6.0
2.5
3.4
0.2

33.6

2040

360.5

11.4
55.3
57.0
69.1
51.3
6.2
1.2

24.0
83.7
6.3
3.1
3.5
0.2

37.2

11.1
55.4
57.1
68.8
51.7
6.2
1.4

24.1
80.5
6.4
3.6
3.7
0.2

37.9

-0.1
-11.7
29.5
1.7
7.5
-2.1
-2.1

12.4
7.4
1.4
2.2
0.0
-0.1

15.9

2050

2060

596.5

884.0

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

16.0
15.1

S1

10.8
10.1

S2

0.0
0.0

IBP

2.4
2.5

S1

16.0
15.1

DR

0.7
0.7

12.5
3.8

LTC

7.7
6.9

1.3
1.3

S2

14.1
13.3

2.1
2.1

IBP

2.6
2.7

0.1
7.9

S2

LTC

11.5
10.6

-0.2
-0.2

Cost of delay

1.1
1.0

RPB

12.7
12.3

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

14.1

0.3

Pure Ageing

0.0

Higher 
labour 
productivity
-1.3
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.4

0.1

2.2

:

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

:

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.3

0.6

0.4

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

3.0

13.6

IBP
0.7

LTC
9.9

Source:  Commission services. 

-1.4

2008

33.8

Average 2000-
07
34.6

107 

 
 
 
 
 
 
 
9. 

SPAIN 

9.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure, Spain has a sustainability gap (S2) of 
11.8%  of  GDP,  which  is  clearly  above  the  EU 
average  (6.5%  of  GDP).    This  means  that  to  put 
public finances on a sustainable path, Spain should 
improve its structural primary balance in a durable 
manner  by  11.8%  of  GDP.  In  principle,  this 
adjustment could take place via both an increase in 
revenues and cuts in expenditure. Additionally, the 
social  protection  system  (in  particular  public 
pensions  and  health  care)  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

the 

In  parallel, 

The  Spanish  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(6.1%  of  GDP),  clearly  above  the  EU  average 
(3.3%  of  GDP). 
required 
adjustment  given  the  long-term  cost  of  ageing 
(5.7%  of  GDP)  is  again  clearly  above  the  EU 
average  (3.3%  of  GDP).  The  long-term  cost  of 
ageing is mainly driven by an increase in pension 
expenditure (by 6.2 p.p. in 2060 relative to 2010), 
while  health  care  and 
long-term  care  also 
contribute  less  but  still  significantly  to  the  long-
term cost of ageing (increasing by 1.6 p.p. and 0.7 
p.p. respectively). 

In the 2006 Sustainability Report, the S2 gap was 
3.2%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (8.6  p.p.)  stems  from  the 
deterioration  of  the  initial  budgetary  position  (8.9 
p.p.), while the component of the long-term cost of 
ageing has decreased by 0.5 p.p. The extension of 
the  projection  period  from  2050  (in  the  2006 
report) to 2060 increases the sustainability gap by 
0.2 p.p. 

The  Spanish  government  debt  in  2009,  the  base 
year of the analysis, stood at to 50.8% of GDP and 
is  forecast  to  increase  to  around  62%  of  GDP  in 
2010. The structural primary balance is forecast to 

108 

deteriorate  from  -5.2%  %  in  2009  to  -6.2%  in 
2010.  Spanish  debt  is  still  both  below  the  EU 
average and the 60% ceiling set by the Maastricht 
criteria,  however  the  widening  of  already  large 
structural  primary  deficits  will  bring  Spanish 
government  debt  above 
limit 
already in 2010 and will aggravate the stance of its 
public finances. 

the  Maastricht 

9.2.  OVERALL ASSESSMENT 

Spain appears to be at high risk with regard to the   
long-term  sustainability  of  public  finances.  The 
long-term  budgetary  impact  of  ageing  is  well 
above  the  EU  average,  mainly  as  a  result  of  a 
relatively high increase in pension expenditure as a 
share  of  GDP  over  the  coming  decades.  The 
budgetary  position 
the 
budgetary  impact  of  population  ageing  on  the 
sustainability gap.  

in  2009  compounds 

Improving  the  primary  balance  over  the  medium 
term  and  further  reforms  to  the  social  security 
system would contribute to reducing the high risks 
to  the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.9.1:  Determinants of fiscal sustainability (Spain) 

ES

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Spain 

Chapter VII 

Table VII.9.1:  Summary table (Spain) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

44.5
68.8
24.2
71.6
47.5
8.3
2.9

8.4
57.8
5.5
0.5
3.5
1.3

19.3

2008
-2.4
39.5

46.7
68.3
24.4
73.3
51.3
20.5
0.2

8.9
62.6
5.6
0.7
3.4
1.4

20.0

2009
-5.2
50.8

49.4
67.0
25.8
75.2
58.4
7.5
3.1

9.2
65.9
5.7
0.9
3.4
1.2

20.4

2010
-6.2
62.3

51.1
66.3
27.4
75.7
63.5
6.2
3.4

9.5
65.2
5.9
0.9
3.5
0.9

20.7

52.1
65.7
30.2
75.8
66.8
6.2
2.5

10.1
63.3
6.1
0.9
3.5
0.9

21.5

2020

111.0

2025

144.5

52.7
64.5
34.3
76.4
70.9
6.2
1.8

10.8
61.0
6.3
1.0
3.4
0.9

22.4

2030

188.2

53.3
59.6
46.4
77.2
72.7
6.2
0.9

13.2
57.2
6.8
1.1
3.2
0.9

25.3

2040

320.2

53.2
54.7
58.7
77.6
73.1
6.2
1.1

15.5
54.5
7.1
1.3
3.5
0.9

28.4

51.9
54.7
59.1
77.3
74.0
6.2
1.6

15.1
52.2
7.2
1.4
3.6
0.9

28.3

7.4
-14.1
34.9
5.7
26.4
-2.1
-1.3

6.7
-5.6
1.6
0.9
0.1
-0.4

9.0

2050

2060

528.0

766.6

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

8.0
11.5

S1

9.5
11.9

S2

0.3
0.3

IBP

5.9
6.1

S1

8.3
11.8

DR

-0.1
-0.1

6.2
8.9

LTC

3.6
5.9

1.6
1.5

S2

11.8
14.8

0.7
0.9

IBP

6.1
6.2

-0.2
0.4

S2

LTC

5.7
8.6

-0.3
-0.4

Cost of delay

RPB

0.8
1.0

6.4
8.5

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

11.8

0.4

Pure Ageing

0.1

Higher 
labour 
productivity
-0.7
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.4

2.6

-0.7

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

:

0.6

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.1

1.3

0.1

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

3.2

11.6

IBP
8.9

LTC
-0.5

Source:  Commission services. 

-0.5

2008

34.3

Average 2000-
07
36.2

109 

 
 
 
 
 
 
10. FRANCE 

10.1.  OVERVIEW OF RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure France has a sustainability gap (S2) of 
5.6%  of  GDP,  which  is  below  the  EU  average 
(6.5%  of  GDP).  This  means  that  to  put  public 
finances  on  a  sustainable  path,  France  should 
improve its structural primary balance in a durable 
manner  by  5.6%  of  GDP.  In  principle,  this 
adjustment  could  take  place  via  an  increase  in 
revenues  or  cuts  in  expenditure.  Alternatively  the 
social  protection  system  would  have 
to  be 
reformed to decelerate the planned increase in age-
related expenditure. 

The  French  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(3.8%  of  GDP),  above  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (1.8%  of  GDP)  is 
below  the  EU  average  (3.2%  of  GDP).  The  long-
term cost of ageing is mainly driven by an increase 
in  health  care  expenditure  (by  1.1  p.p.  in  2060 
relative  to  2010),  while  pensions  and  long-term 
care contribute to the long-term cost of ageing by a 
lesser  amount  (increasing  by  0.6  p.p.  and  0.7  p.p. 
respectively). 

In the 2006 Sustainability Report, the S2 gap was 
4.0%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (1.6  p.p.)  stems  from  the 
deterioration  of  the  initial  budgetary  position  (2.5 
p.p.), while the component of the long-term cost of 
ageing  has  actually  decreased  (-0.7  p.p.).  The 
extension  of  the  projection  period  from  2050  (in 
the 2006 report) increases the sustainability gap by 
1.6 p.p.  

The  French  government  debt  in  2009,  the  base 
year of the analysis, stood at 79.7% of GDP and is 
forecast  to  increase  to  around  86%  of  GDP  in 
2010. The structural primary balance is forecast to 
slightly  improve  from  -2.7%  in  2009  to  -2.5%  in 
2010.  French  debt  is  above  both  the  EU  average 

110 

and  the  60%  ceiling  set  by  the  Maastricht  criteria 
which  poses  risks  for  the  medium  and  long  term. 
The continuing structural primary deficits may also 
pose  some  risk  for  the  long-term  sustainability  of 
its public finances. 

10.2.  OVERALL ASSESSMENT 

France appears to be at medium risk with regard to 
the long-term sustainability of public finances. The 
long-term  budgetary  impact  of  ageing  is  lower 
than  the  EU  average,  due  to  reforms  to  the  social 
security  system  already  enacted.  The  budgetary 
position in 2009 compounds the budgetary impact 
of  population  ageing  on  the  sustainability  gap. 
Moreover, the current level of gross debt, which is 
above  the  Treaty  reference  value,  adds  to  the 
sustainability  risk.  Also,  the  forecast  structural 
primary deficits may widen the sustainability gap.  

Given  that  France  has  little  scope  to  increase  its 
tax  burden,  already  one  of  the  highest  in  the 
European  Union,  focus  should  be  put  on  cuts  in 
public expenditure. Specifically, further reforms to 
the  social  security  system  aimed  at  curbing  the 
increase 
in  age-related  expenditures  would 
contribute  to  reducing  risks  to  the  long-term 
sustainability  of  public  finances.  Reforms  should 
however  be  pursued  in  a  manner  that  do  not 
amplify  the  fallouts  of  the  current  economic  and 
financial crisis. 

Graph VII.10.1: Determinants of fiscal sustainability (France) 

FR

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, France 

Chapter VII 

Table VII.10.1:  Summary table (France) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

61.5
65.2
25.2
70.3
41.0
8.4
1.6

13.0
63.3
8.1
1.4
4.7
1.2

28.4

2008
-1.5
68.0

62.6
64.8
25.8
70.0
39.3
10.7
0.7

13.5
63.3
8.2
1.5
4.6
1.2

29.0

2009
-2.7
79.7

64.2
63.1
29.3
70.6
42.9
7.0
2.0

13.5
60.6
8.4
1.5
4.6
1.1

29.1

2010
-2.5
86.0

65.6
61.6
32.8
70.8
46.1
6.2
1.9

13.6
57.7
8.6
1.6
4.6
0.9

29.4

66.8
60.5
35.8
70.7
47.7
6.2
1.8

13.9
55.0
8.7
1.6
4.7
0.9

29.8

2020

122.4

2025

147.4

68.0
59.4
39.0
70.9
48.8
6.2
1.7

14.2
52.9
8.9
1.8
4.7
0.9

30.5

2030

177.4

69.9
57.6
44.0
71.7
49.4
6.2
1.8

14.4
50.3
9.2
2.0
4.6
0.9

31.3

2040

250.5

71.0
57.3
44.7
71.5
48.4
6.2
1.8

14.2
48.3
9.3
2.2
4.7
0.9

31.3

71.8
57.4
45.2
71.6
49.3
6.2
1.8

14.0
47.5
9.4
2.2
4.6
0.9

31.2

10.3
-7.8
20.0
1.3
8.3
-2.2
0.2

1.0
-15.8
1.2
0.8
0.0
-0.3

2.7

2050

2060

336.5

431.3

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

2.1
3.0

S1

5.5
6.6

S2

0.0
0.0

IBP

3.8
3.9

S1

2.2
3.0

DR

0.4
0.4

0.6
1.2

LTC

1.4
2.3

1.1
1.1

S2

5.6
6.6

0.7
0.8

IBP

3.8
3.9

-0.2
-0.1

S2

LTC

1.8
2.7

-0.2
-0.2

Cost of delay

RPB

0.3
0.4

2.8
3.3

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

5.6

0.6

Pure Ageing

0.1

Higher 
labour 
productivity
-0.6
Constant 
Health 
Status
-0.6

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.5

-0.5

1.4

:

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.4

:

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.1

0.4

0.2

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

4.0

5.8

IBP
2.5

LTC
-0.7

Source:  Commission services. 

-0.6

2008

44.8

Average 2000-
07
45.5

111 

 
 
 
  
 
 
 
 
 
11. ITALY 

11.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Italy  has  a  sustainability  gap  (S2)  of 
1.4% of GDP, which is significantly below the EU 
average  (6.5%  of  GDP).  This  means  that  to  put 
public finances on a sustainable path, Italy should 
improve its structural primary balance in a durable 
manner  by  1.4%  of  GDP.  In  principle,  this 
adjustment  could  take  place  via  an  increase  in 
revenues or cuts in expenditure. Alternatively, the 
social  protection  system  would  have 
to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

In  contrast, 

(3.3%  of  GDP). 

The Italian sustainability gap is  mainly due to the 
required  adjustment  given  the  long-term  cost  of 
ageing  (1.5%  of  GDP),  which  is  below  the  EU 
average 
the 
sustainability  gap  is  mitigated  by  the  initial 
budgetary  position,  i.e.  the  required  adjustment  to 
stabilise the debt ratio is negative (-0.1% of GDP) 
clearly below the EU average (3.2% of GDP). The 
increase in the long-term cost of ageing is mainly 
driven  by  health-care  and 
long-term  care 
expenditure  (increasing  by  respectively  1.0  p.p. 
and  1.2  p.p.    in  2060  relative  to  2010),  while  the 
ratio of pension expenditure to GDP is expected to 
fall by 0.4 p.p.  

In the 2006 Sustainability Report, the S2 gap was 
3.1%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (-1.7  p.p.)  stems  mainly 
from  the  improvement  of  the  initial  budgetary 
position  (1.2  p.p.),  while  the  component  of  the 
long-term cost of ageing has increased by 0.2 p.p. 
The  extension  of  the  projection  period  from  2050 
(in 
the 
the  2006  report) 
sustainability gap by 0.6 p.p. 

to  2060  decreases 

The Italian government debt in 2009, the base year 
of  the  analysis,  stood  at  113.0%  of  GDP  and  is 
forecast  to  increase  to  around  116%  of  GDP  in 
2010. The structural primary surplus is forecast to 
stay  at  the  level  of  2.0%  both  in  2009  and  2010. 

112 

Italian  debt  is  far  above  both  the  EU  average  and 
the  60%  ceiling  set  by  the  Maastricht  criteria 
which  poses  significant  risks  for  the  long-term 
sustainability of its public finances. 

11.2.  OVERALL ASSESSMENT 

the  EU 

Italy  appears  to  be  at  medium  risk  with  regard  to 
the long-term sustainability of public finances. The 
long-term  budgetary  impact  of  ageing  is  lower 
than 
average.  However  pension 
expenditure as a share of GDP remains among the 
highest  in  the  EU  and  the  projections  hinge  upon 
the  assumption  that  the  adopted  reforms  are  fully 
implemented.  The  budgetary  position  in  2009 
would  be  sufficient  to  stabilise  the  current  debt 
ratio  but  would  not  contribute  to  offsetting  the 
projected  long-term  budgetary  impact  of  ageing. 
Moreover, the current level of gross debt, which is 
above  the  Treaty  reference  value,  adds  to  the 
sustainability risk.  

Achieving high primary surpluses would therefore 
contribute to limiting the medium risk to the long-
term  sustainability  of  public  finances.  Reforms 
should however be pursued in a manner that do not 
amplify  the  fallouts  of  the  current  economic  and 
financial crisis. 

Graph VII.11.1: Determinants of fiscal sustainability (Italy) 

IT

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Italy 

Chapter VII 

Table VII.11.1:  Summary table (Italy) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

59.1
66.0
30.2
62.6
34.7
6.1
0.9

14.0
68.5
5.9
1.7
4.1
0.4

26.0

60.0
65.6
31.0
63.7
39.2
9.4
0.5

14.0
71.3
5.9
1.7
4.0
0.3

26.0

60.9
64.5
33.6
65.7
48.7
5.8
2.1

14.0
71.9
6.1
1.8
3.9
0.3

26.0

61.4
63.9
35.5
66.4
54.0
5.8
1.9

14.1
70.5
6.2
1.8
3.8
0.3

26.3

61.7
63.3
38.0
66.9
58.8
5.8
1.7

14.3
67.5
6.4
1.9
3.7
0.3

26.6

2008
1.7
105.8

2009
2.0
113.0

2010
2.0
116.1

2020

109.9

2025

109.0

61.9
61.6
42.4
67.4
62.3
5.8
1.4

14.8
64.1
6.5
2.0
3.6
0.3

27.3

2030

112.2

62.0
57.0
54.1
67.7
61.9
5.8
1.0

15.6
57.3
6.9
2.3
3.6
0.3

28.7

2040

136.6

61.2
55.1
59.2
67.9
62.8
5.8
1.3

14.7
51.7
7.0
2.8
3.8
0.3

28.6

59.4
55.1
59.3
67.7
63.1
5.8
1.4

13.6
47.3
6.9
3.0
3.8
0.3

27.6

0.3
-10.9
29.2
5.1
28.4
-0.3
0.5

-0.4
-21.2
1.1
1.3
-0.3
0.0

1.6

2050

2060

173.1

205.9

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

1.6
1.8

S1

1.9
2.7

S2

S1

0.0
0.0

IBP

-0.2
0.0

1.6
1.7

DR

0.7
0.7

-0.4
-0.4

LTC

1.4
1.9

1.0
1.0

S2

1.4
1.8

1.2
1.3

IBP

-0.1
0.0

-0.2
-0.1

S2

LTC

1.5
1.8

-0.2
-0.2

Cost of delay

RPB

0.1
0.2

3.4
3.5

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

1.4

0.3

Pure Ageing

0.1

Higher 
labour 
productivity
-0.4
Constant 
Health 
Status
-0.4

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.1

-0.1

3.4

:

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

:

0.5

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.4

0.8

0.3

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

3.1

2.0

IBP
-1.2

LTC
0.2

Source:  Commission services. 

-0.8

2008

43.1

Average 2000-
07
41.8

113 

 
 
 
 
 
12. CYPRUS 

12.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Cyprus has a sustainability gap (S2) 
of 8.8% of GDP, which  is  significantly  above  the 
EU  average  (6.5%  of  GDP).    This  means  that  to 
put  public  finances  on  a  sustainable  path,  Cyprus 
should improve its structural primary balance in a 
durable manner by 8.8% of GDP. In principle, this 
adjustment could take place via both an increase in 
revenues and cuts in expenditure. Additionally, the 
social  protection  system  (in  particular  public 
pensions) would have to be reformed to decelerate 
the  projected  increase  in  age-related  expenditure. 
(34) 

The  Cypriot  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  slightly 
positive  (0.5%  of  GDP),  below  the  EU  average 
(3.3%  of  GDP). 
required 
adjustment  given  the  long-term  cost  of  ageing 
(8.3%  of  GDP)  is  clearly  above  the  EU  average 
(3.2%  of  GDP).  The  long-term  cost  of  ageing  is 
mainly  driven  by  an 
in  pension 
expenditure (by 10.8 p.p. in 2060 relative to 2010). 

In  parallel, 

increase 

the 

In the 2006 Sustainability Report, the S2 gap was 
8.5%  of  GDP.  The  difference  between  that  report 
and the current results (0.3 p.p.) stems mainly from 
the  deterioration  of  the  initial  budgetary  position 
(0.4  p.p.),  while  the  component  of  the  long-term 
cost  of  ageing  has  actually  decreased  (-1.7  p.p.). 
The  extension  of  the  projection  period  from  2050 
(in 
the 
the  2006  report) 
sustainability gap by 1.6 p.p. 

increases 

to  2060 

The  Cypriot  government  debt  in  2009,  the  base 
year of the analysis, stood at 47.5% of GDP and is 

(34)  In  February  2009  the  Cypriot  government  adopted  a 
pension  reform  which  places  the  burden  on  contribution 
increases  but  does  not  address  the  large  increases  in 
pension  expenditures.  The  effects  of  the  reform  were  not 
reflected in the 2009 Ageing report pension projections. 

114 

forecast  to  increase  to  around  47%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  slightly  from  0.2%  in  2009  to  0.1%  in 
2010. Currently, Cypriot debt is both below the EU 
average and the 60% ceiling set by the Maastricht 
criteria.  

12.2.  OVERALL ASSESSMENT 

Cyprus appears to be at high risk with regard to the 
long-term  sustainability  of  public  finances.  The 
long-term  budgetary  impact  of  ageing  is  well 
above  the  EU  average,  mainly  as  a  result  of  a 
relatively high increase in pension expenditure as a 
share  of  GDP  over  the  coming  decades.  The 
budgetary position in 2009 compounds slightly the 
budgetary  impact  of  population  ageing  on  the 
sustainability gap.  

Improving  primary  surpluses  over  the  medium 
term and especially a further reform of the pension 
system aimed at curbing the substantial increase in 
age-related  expenditures  would  contribute 
to 
reducing  risks  to  the  long-term  sustainability  of 
public  finances.  Reforms  should  however  be 
pursued  in  a  manner  that  do  not  amplify  the 
fallouts  of  the  current  economic  and  financial 
crisis. 

Graph VII.12.1: Determinants of fiscal sustainability (Cyprus) 

CY

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
                                                           
 
Sustainability assessment per Member State, Cyprus 

Chapter VII 

Table VII.12.1:  Summary table (Cyprus) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

0.8
69.8
17.6
72.9
57.6
4.0
2.9

6.3
53.7
2.7
0.0
6.1
0.3

15.4

2008
2.9
49.1

0.8
70.3
18.0
74.6
58.9
5.9
2.4

6.9
57.6
2.8
0.0
5.6
0.3

15.5

2009
0.2
47.5

0.9
69.3
19.9
76.9
61.1
3.4
3.8

7.8
59.1
2.8
0.0
4.9
0.3

15.8

2010
0.1
47.9

1.0
67.5
22.3
78.5
62.7
3.4
3.9

8.9
60.0
2.9
0.0
4.8
0.3

16.8

2020

42.6

1.0
66.1
24.9
78.6
63.1
3.4
3.2

9.8
58.2
2.9
0.0
4.9
0.3

17.9

2025

51.6

1.1
65.4
27.4
78.4
64.6
3.4
2.9

10.8
57.4
3.0
0.0
5.0
0.2

19.1

2030

67.8

1.2
64.9
30.8
78.0
66.6
3.4
2.3

12.8
59.2
3.1
0.0
4.8
0.2

21.0

2040

119.2

1.3
61.7
37.7
78.0
65.4
3.4
1.8

15.5
58.4
3.2
0.0
4.7
0.2

23.7

1.3
58.8
44.5
78.0
65.1
3.4
1.8

17.7
56.5
3.3
0.0
5.0
0.2

26.2

0.5
-10.9
26.8
5.1
7.4
-0.6
-1.1

11.4
2.9
0.6
0.0
-1.2
-0.1

10.8

2050

2060

204.4

335.5

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

10.7
10.6

S1

4.6
4.6

S2

0.0
0.0

IBP

0.2
0.3

S1

10.7
10.6

DR

-0.3
-0.3

10.8
10.4

LTC

4.7
4.6

0.6
0.5

S2

8.8
8.7

0.0
0.0

IBP

0.5
0.5

-0.6
-0.4

S2

LTC

8.3
8.2

-0.5
-0.5

Cost of delay

RPB

0.4
0.4

8.9
8.4

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

8.8

0.4

Pure Ageing

0.2

Higher 
labour 
productivity
-0.5
Constant 
Health 
Status
-0.4

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.1

0.6

4.7

:

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.1

0.3

3.1

0.5

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.0

0.0

0.0

0.0

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

8.5

7.2

IBP
0.4

LTC
-1.7

Source:  Commission services. 

2008

39.4

Average 2000-
07
33.1

115 

 
 
 
 
 
 
average and the 60% ceiling set by the Maastricht 
criteria, however the dramatic size of its structural 
primary  deficit  poses  an  additional  risk  to  the 
sustainability of public finances. 

13.2.  OVERALL ASSESSMENT 

Latvia appears to be at high risk with regard to the 
long-term  sustainability  of  public  finances.  The 
long-term  budgetary  impact  of  ageing  is  lower 
than  the  EU  average,  as  a  result  of  the  pension 
enacted.  However, 
already 
the 
reforms 
position 
budgetary 
of 
the 
deterioration 
significantly 
the 
to 
risks 
the 
increases 
sustainability of public finances. 

Increasing  the  primary  balances  over  the  medium 
term  would  contribute  to  reducing  risks  to  the 
long-term 
finances. 
sustainability  of  public 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.13.1: Determinants of fiscal sustainability (Latvia) 

LV

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

13. LATVIA 

13.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,    Latvia  has  a  sustainability  gap  (S2) 
of 9.9% of GDP, which  is  significantly  above  the 
EU  average  (6.5%  of  GDP).    This  means  that  to 
put  public  finances  on  a  sustainable  path,  Latvia 
should improve its structural primary balance in a 
durable manner by 9.9% of GDP. In principle, this 
adjustment could take place via both an increase in 
revenues  and  cuts  in  expenditure.  Alternatively, 
the  social  protection  system  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

i.e. 

the 

In  parallel, 

The Latvian sustainability gap is mainly due to the 
initial  budgetary  position, 
required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(8.9%  of  GDP),  clearly  above  the  EU  average 
(3.3%  of  GDP). 
required 
adjustment  given  the  long-term  cost  of  ageing 
(1.0% of GDP) is below the EU average (3.2% of 
GDP).  The  limited  increase  in  the  long-term  cost 
of  ageing  is  mainly  driven  by  long-term  care  and 
health-care expenditure (increasing by 0.5 p.p. and 
0.5  p.p.  respectively  in  2060  relative  to  2010), 
while  the  ratio  of  pension  expenditure  to  GDP 
remains at the current level. 

the 

In the 2006 Sustainability Report, the S2 gap was 
0.8%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (9.1  p.p.)  stems  only  from 
the  deterioration  of  the  initial  budgetary  position 
(9.5  p.p.),  while  the  component  of  the  long-term 
cost  of  ageing  has  actually  decreased  (-0.1  p.p.). 
The  extension  of  the  projection  period  from  2050 
(in 
the 
the  2006  report) 
sustainability gap by -0.2 p.p. 

to  2060  decreases 

The  Latvian  government  debt  in  2009,  the  base 
year of the analysis, stood at 34.1% of GDP and is 
forecast  to  increase  to  around  50%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  slightly  from  -8.1%  in  2009  to  -9.2%  in 
2010. Currently, Latvian debt is both below the EU 

116 

 
 
 
Sustainability assessment per Member State, Latvia 

Chapter VII 

Table VII.13.1:  Summary table (Latvia) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

2.3
68.9
24.8
72.9
60.4
6.0
5.3

5.4
24.0
3.5
0.4
3.7
0.2

13.2

2008
-4.9
19.5

2.2
69.0
25.2
74.2
59.3
16.0
-0.2

5.1
25.7
3.5
0.4
3.1
0.2

12.3

2009
-8.1
34.1

2.2
67.6
26.2
76.1
60.0
4.8
3.0

4.8
25.3
3.6
0.4
2.8
0.2

11.8

2010
-9.2
50.1

2.2
66.1
28.1
75.3
58.5
4.8
2.1

5.2
25.2
3.7
0.4
3.0
0.2

12.4

2.1
65.0
31.1
74.0
56.2
4.8
2.0

5.6
24.3
3.7
0.5
3.2
0.2

13.2

2.0
64.2
34.6
73.9
58.6
4.8
1.8

5.9
23.4
3.8
0.5
3.2
0.2

13.5

2020

122.2

2025

173.6

2030

230.6

1.9
62.4
40.7
73.7
58.8
4.8
0.7

6.1
21.3
3.9
0.6
2.9
0.2

13.8

2040

385.9

1.8
57.8
51.2
72.0
54.4
4.8
-0.1

5.8
16.1
4.0
0.7
3.1
0.2

13.8

1.7
53.3
64.5
74.2
58.1
4.8
1.1

5.1
12.6
4.1
0.9
3.3
0.2

13.6

-0.6
-15.6
39.7
1.3
-2.3
-1.2
-4.2

-0.4
-11.4
0.6
0.5
-0.3
0.0

0.4

2050

2060

619.7

898.1

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

1.3
1.8

S1

9.4
10.2

S2

0.0
0.0

IBP

8.8
9.0

S1

1.3
1.8

DR

-0.2
-0.2

0.0
0.2

LTC

0.9
1.4

0.5
0.5

S2

9.9
10.6

0.5
0.6

IBP

8.9
9.0

0.3
0.5

S2

LTC

1.0
1.6

-0.2
-0.2

Cost of delay

RPB

0.9
1.0

2.2
2.5

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

9.9

0.2

Pure Ageing

0.0

Higher 
labour 
productivity
-0.1
Constant 
Health 
Status
-0.4

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.1

-0.1

0.2

:

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.2

2.5

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.1

0.6

0.1

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

0.8

10.1

IBP
9.5

LTC
-0.1

Source:  Commission services. 

-0.3

2008

29.6

Average 2000-
07
29.4

117 

 
 
 
 
 
14. LITHUANIA 

14.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,    Lithuania  has  a  sustainability  gap 
(S2)  of  7.1%  of  GDP,  which  is  above  the  EU 
average  (6.5%  of  GDP).    This  means  that  to  put 
public  finances  on  a  sustainable  path,  Lithuania 
should improve its structural primary balance in a 
durable manner by 7.1% of GDP. In principle, this 
adjustment could take place via both an increase in 
revenues  and  cuts  in  expenditure.  Alternatively, 
the  social  protection  system  (in  particular  public 
pensions  and  health  care)  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

The  Lithuanian  sustainability  gap  is  compounded 
by  the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(3.9%  of  GDP),  above  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (3.2%  of  GDP)  is  at 
the  EU  average.  The  long-term  cost  of  ageing  is 
mainly  driven  by  an 
in  pension 
expenditure (by 4.9 p.p. in 2060 relative to 2010), 
while  health  and  long-term  care  expenditure  also 
contribute  to  the  long-term  cost  of  ageing  by 
growing 1.0 p.p. and 0.6 p.p. 

increase 

In the 2006 Sustainability Report, the S2 gap was 
1.8%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (5.9  p.p.)  stems  from  the 
deterioration  of  the  initial  budgetary  position  (3.4 
p.p.), while the component of the long-term cost of 
ageing has  increased by  1.3 p.p. The  extension  of 
the  projection  period  from  2050  (in  the  2006 
report) to 2060 increases the sustainability gap by 
0.5 p.p. 

The Lithuanian government debt in 2009, the base 
year of the analysis, stood at 22.6% of GDP and is 
forecast  to  increase  to  around  32%  of  GDP  in 
2010. The structural primary balance is forecast to 
deteriorating from -3.1% in 2009 to -3.9% in 2010. 
Lithuanian debt is both below the EU average and 

118 

the  60%  ceiling  set  by  the  Maastricht  criteria, 
however  the  widening  of  already  large  structural 
primary  deficits  may  aggravate  the  sustainability 
gap of its public finances. 

14.2.  OVERALL ASSESSMENT 

Lithuania appears to be at medium risk with regard 
to  the  long-term  sustainability  of  public  finances. 
The long-term budgetary impact of ageing is at the 
EU  average,  the  rise  is  due  mainly  to  pension 
expenditure. The budgetary position has worsened 
considerably 
the 
budgetary  impact  of  population  ageing  on  the 
sustainability gap.  

in  2009  and  compounds 

Improving  the  primary  balance  over  the  medium 
term  and  further  reforms  to  the  social  security 
system  would  contribute  to  reducing  risks  to  the 
long-term 
finances. 
sustainability  of  public 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.14.1: Determinants of fiscal sustainability (Lithuania) 

LT

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Lithuania 

Chapter VII 

Table VII.14.1:  Summary table (Lithuania) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

3.4
68.5
22.7
68.1
55.5
4.3
6.2

6.8
33.1
4.5
0.5
4.0
0.1

15.8

2008
-4.5
15.6

3.3
69.2
23.2
69.0
58.5
15.9
1.4

6.5
33.5
4.6
0.5
3.5
0.0

15.1

2009
-3.1
22.6

3.3
69.1
24.0
70.6
59.9
3.5
3.6

6.5
33.2
4.7
0.5
2.9
0.0

14.8

2010
-3.9
31.9

3.2
67.6
26.0
71.0
59.4
3.5
2.5

6.9
32.7
4.9
0.5
2.8
0.0

15.1

2020

61.8

3.2
65.7
29.7
70.1
56.3
3.5
1.8

7.6
32.2
5.0
0.5
2.9
0.0

16.0

2025

83.9

3.1
63.8
34.7
69.1
56.0
3.5
1.5

8.2
31.6
5.1
0.6
3.0
0.0

16.9

2030

113.9

2.9
61.5
42.8
68.3
56.9
3.5
0.8

9.1
30.3
5.3
0.7
2.9
0.0

18.1

2040

204.3

2.7
58.1
51.1
67.6
54.8
3.5
0.2

10.4
29.0
5.5
0.9
2.8
0.0

19.6

2.5
52.9
65.7
68.2
54.1
3.5
0.4

11.4
27.7
5.6
1.1
3.1
0.0

21.2

-0.8
-15.6
42.9
0.1
-1.4
-0.8
-5.7

4.6
-5.4
1.1
0.6
-0.9
0.0

5.4

2050

2060

341.2

545.9

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

6.0
6.9

S1

5.4
6.1

S2

0.0
0.0

IBP

3.7
3.9

S1

6.0
6.9

DR

-0.3
-0.3

4.9
5.5

LTC

2.0
2.5

1.0
0.9

S2

7.1
7.8

0.6
0.7

IBP

3.9
4.0

-0.4
-0.2

S2

LTC

3.2
3.8

-0.2
-0.2

Cost of delay

RPB

0.7
0.8

4.2
4.7

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

7.1

0.4

Pure Ageing

0.1

Higher 
labour 
productivity
0.0
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

0.2

-0.1

-0.4

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

1.6

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.1

0.2

0.1

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

1.8

6.6

IBP
3.4

LTC
1.3

Source:  Commission services. 

-0.3

2008

30.7

Average 2000-
07
29.2

119 

 
 
 
 
 
15. LUXEMBOURG 

15.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Luxembourg has a sustainability gap 
(S2) of 12.5% of GDP, which is clearly above the 
EU  average  (6.5%  of  GDP).    This  means  that  to 
put  public 
finances  on  a  sustainable  path, 
Luxembourg should improve its structural primary 
balance in a durable manner by 12.5% of GDP. In 
principle, this adjustment could take place via both 
an  increase  in  revenues  and  cuts  in  expenditure. 
Additionally,  the  social  protection  system  (in 
particular  public  pensions)  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

The sustainability gap in Luxembourg is mitigated 
by  the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  slightly 
negative  (-0.4%  of  GDP),  below  the  EU  average 
(3.3%  of  GDP). 
required 
adjustment  given  the  long-term  cost  of  ageing 
(12.9%  of  GDP)  is  the  highest  in  the  EU.  The 
long-term  cost  of  ageing  is  mainly  driven  by  an 
increase  in  pension  expenditure  (by  7.4%  p.p.  in 
2060 relative to 2010). 

In  parallel, 

the 

In the 2006 Sustainability Report, the S2 gap was 
9.5%  of  GDP.  The  difference  between  that  report 
and the current results (3.0 p.p.) stems mainly from 
the  increase  in  the  long-term  cost  of  ageing  (3.6 
p.p.),  while  the  initial  budgetary  position  has 
actually improved by 0.4 p.p. The extension of the 
projection period from 2050 (in the 2006 report) to 
2060 increases the sustainability gap by 1.1 p.p. 

The  Luxemburgish  government  debt  in  2009,  the 
base  year  of  the  analysis,  stood  at  16.0%  of  GDP 
and is forecast to decrease to around 16% of GDP 
in 2010. The structural primary balance is forecast 
to  decrease  from  1.2%  in  2009  to  0.7%  in  2010. 
The  Luxemburgish  debt  is  both  below  the  EU 
average and the 60% ceiling set by the Maastricht 
criteria.  

120 

15.2.  OVERALL ASSESSMENT 

Luxembourg  appears  to  be  at  medium  risk  with 
regard  to  the  long-term  sustainability  of  public 
finances.  The  long-term  budgetary  impact  of 
ageing in Luxembourg is among the highest in the 
EU,  influenced  notably  by  a  very  considerable 
projected  increase  in  pension  expenditure.  The 
budgetary position in 2009, the low debt ratio, the 
significant  assets  accumulated  in  social  security, 
and  a  structural  primary  surplus  contribute  to 
offsetting 
long-term  budgetary 
impact of ageing populations. However, this is not 
sufficient  to  cover  the  sizeable  increase  in  age-
related expenditure.  

the  projected 

Achieving  high  primary  surpluses  over 
the 
medium term and implementing measures aimed at 
curbing  the  substantial  increase  in  age-related 
expenditures  would  contribute  to  reducing  the 
medium  risk  to  the  long-term  sustainability  of 
public  finances.  Reforms  should  however  be 
pursued  in  a  manner  that  do  not  amplify  the 
fallouts  of  the  current  economic  and  financial 
crisis. 

Graph VII.15.1: Determinants of fiscal sustainability (Luxembourg) 

LU

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
 
 
Sustainability assessment per Member State, Luxembourg 

Chapter VII 

Table VII.15.1:  Summary table (Luxembourg) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

0.5
67.6
20.7
66.4
33.0
4.2
3.5

8.7
45.8
5.8
1.4
3.8
0.4

20.0

2008
2.3
14.7

0.5
67.8
21.1
67.0
36.4
7.0
1.9

8.6
41.4
5.9
1.4
3.6
0.4

19.9

2009
1.2
16.0

0.5
67.6
22.3
67.1
39.0
4.6
4.0

8.9
38.0
6.1
1.4
3.2
0.4

20.0

2010
0.7
16.4

0.6
66.9
24.2
66.9
40.6
4.6
2.7

9.9
37.0
6.2
1.5
3.1
0.4

21.1

2020

6.3

0.6
65.4
27.1
66.8
40.9
4.6
2.3

12.1
39.1
6.4
1.6
3.1
0.4

23.7

2025

14.8

0.6
63.5
30.8
66.9
40.4
4.6
2.1

14.2
39.3
6.5
1.8
3.2
0.4

26.1

2030

35.6

0.7
61.1
36.3
67.3
41.9
4.6
2.2

18.4
41.1
6.8
2.4
3.3
0.4

31.3

2040

118.2

0.7
60.8
37.8
67.1
42.3
4.6
2.2

22.1
42.9
7.0
3.0
3.3
0.4

35.7

0.7
60.3
39.1
66.8
41.3
4.6
2.0

23.9
44.1
7.0
3.4
3.3
0.4

38.0

0.3
-7.4
18.3
0.4
8.4
0.4
-1.5

15.2
-1.7
1.2
2.0
-0.5
0.0

18.0

2050

2060

253.8

437.5

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

16.2
16.4

S1

6.2
7.5

S2

1.9
1.9

IBP

-0.6
-0.6

S1

18.2
18.3

DR

-0.8
-0.8

15.3
14.9

LTC

7.5
8.9

1.1
1.0

S2

12.5
13.2

2.0
2.4

IBP

-0.4
-0.4

-0.3
0.0

S2

LTC

12.9
13.5

-0.8
-0.8

Cost of delay

0.5
0.6

RPB

13.6
13.4

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

12.5

0.6

Pure Ageing

0.1

Higher 
labour 
productivity
-0.1
Constant 
Health 
Status
-0.6

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.2

6.8

-2.4

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.4

:

0.1

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.3

0.7

0.4

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

9.5

11.5

IBP
-1.6

LTC
3.6

Source:  Commission services. 

-1.6

2008

38.6

Average 2000-
07
38.8

121 

 
 
 
 
 
16.2.  OVERALL ASSESSMENT 

the  EU 

Hungary appears to be at medium risk with regard 
to  the  long-term  sustainability  of  public  finances. 
The long-term budgetary impact of ageing is lower 
than 
average.  However  pension 
expenditure  as  a  share of GDP  remains  above  the 
EU average. The budgetary position in 2009 would 
be  sufficient  to  stabilise  the  current  debt  ratio  but 
would  not  contribute  to  offsetting  the  projected 
long-term  budgetary  impact  of  ageing.  Moreover, 
the current level of gross debt, which is above the 
Treaty  reference  value,  adds  to  the  sustainability 
risk.  

Achieving  high  primary  surpluses  and  further 
reforms  to  the  social  security  system  would 
therefore contribute to limiting the medium risk to 
the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.16.1: Determinants of fiscal sustainability (Hungary) 

HU

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

16. HUNGARY 

16.1.  OVERVIEW OF THE RESULTS 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure, Hungary has a negative sustainability 
gap (S2) of -0.1% of GDP, which is clearly below 
the EU average (6.5% of GDP).  

the  projected 

increases 

in  age 

While  the  Hungarian  overall  sustainability  gap  is 
negative,  the  required  adjustment  given  the  long-
term  cost  of  ageing  is  positive  (1.5%  of  GDP), 
which is below the EU average (3.3% of GDP). In 
contrast,  the  sustainability  gap  is  mitigated  by  the 
initial  budgetary  position, 
required 
adjustment to stabilise the debt ratio is negative (-
1.6% of GDP) clearly below the EU average (3.2% 
of  GDP).  The  increase  in  the  long-term  cost  of 
ageing is mainly driven by pension and health care 
expenditure  (increasing  by  2.6  p.p.  and  1.3  p.p. 
respectively  in  2060  relative  to  2010),  while  the 
ratio  of  long-term  care  expenditure  to  GDP 
increases by 0.4 p.p.  

the 

i.e. 

In the 2006 Sustainability Report, the S2 gap was 
(9.8% of GDP). The difference between that report 
and the current results (-9.9 p.p.) stems both from 
the  improvement  of  the  initial  budgetary  position 
(6.2 p.p.) and the decrease in the long-term cost of 
ageing  (4.0  p.p.)  The  extension  of  the  projection 
period  from  2050  (in  the  2006  report)  to  2060 
increases the sustainability gap by 0.3 p.p. 

The Hungarian government debt in 2009, the base 
year of the analysis, stood at 80.8% of GDP and is 
forecast  to  increase  to  around  82%  of  GDP  in 
2010. The structural primary surplus is forecast to 
decrease from  the level of 3.1% in 2009 to 2.9 in 
2010.  Hungarian  debt  is  above  both  the  EU 
average and the 60% ceiling set by the Maastricht 
criteria which poses significant risks for the long-
term sustainability of its public finances. 

122 

 
 
 
Sustainability assessment per Member State, Hungary 

Chapter VII 

Change      

2007 - 2060

-1.3
-13.5
34.5
3.2
15.2
-1.2
-0.3

3.0
-3.1
1.3
0.4
-0.4
-0.1

4.1

Table VII.16.1:  Summary table (Hungary) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

10.1
68.9
23.2
61.7
34.1
7.4
1.4

10.9
38.9
5.8
0.3
4.4
0.3

21.6

2008
-0.3
73.0

10.0
68.6
24.2
63.4
42.1
11.2
0.1

11.3
42.3
5.8
0.3
4.1
0.3

21.8

2009
3.1
80.8

10.0
67.4
26.3
65.4
46.4
7.0
2.8

10.9
41.6
5.9
0.3
3.8
0.3

21.2

2010
2.9
82.3

9.9
65.4
30.3
66.6
47.2
6.2
2.4

11.0
41.3
6.0
0.3
3.8
0.2

21.3

2020

54.4

9.8
64.3
33.3
66.8
50.4
6.2
2.1

10.9
40.1
6.2
0.3
3.8
0.2

21.5

2025

38.0

9.7
64.5
34.1
65.9
50.8
6.2
2.1

11.0
38.8
6.4
0.4
3.7
0.2

21.7

2030

21.8

9.4
62.2
40.1
64.3
48.8
6.2
1.1

12.2
37.7
6.7
0.4
3.7
0.2

23.2

2040

-5.2

9.1
57.7
50.8
64.9
49.4
6.2
0.8

13.2
36.6
6.9
0.5
3.8
0.2

24.7

2050

-21.1

8.7
55.4
57.6
65.0
49.3
6.2
1.0

13.8
35.8
7.0
0.6
4.0
0.2

25.7

2060

-26.3

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

3.3
3.5

S1

-1.1
0.3

S2

S1

0.7
0.7

IBP

-1.9
-1.6

4.0
4.1

DR

0.4
0.4

2.6
2.5

LTC

0.4
1.5

1.3
1.2

S2

-0.1
0.9

0.4
0.4

IBP

-1.6
-1.4

-0.3
0.0

S2

LTC

1.5
2.3

-0.2
-0.2

Cost of delay

RPB

0.0
0.1

3.5
3.6

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

-0.1

0.6

Pure Ageing

0.3

Higher 
labour 
productivity
-0.2
Constant 
Health 
Status
-0.7

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.1

1.4

0.2

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.1

0.6

1.1

0.9

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.1

0.3

0.1

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

9.8

-0.4

IBP
-6.2

LTC
-4.0

Source:  Commission services. 

-0.2

2008

40.6

Average 2000-
07
38.1

123 

 
 
 
 
 
 
17. MALTA 

17.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Malta has a sustainability gap (S2) of 
7.0%  of  GDP,  which  is  above  the  EU  average 
(6.5%  of  GDP).    This  means  that  to  put  public 
finances  on  a  sustainable  path,  Malta  should 
improve its structural primary balance in a durable 
manner  by  7.0%  of  GDP.  In  principle,  this 
adjustment could take place via both an increase in 
revenues and cuts in expenditure. Additionally, the 
social  protection  system  (in  particular  public 
pensions,  health  care  and  long-term  care)  would 
have  to  be  reformed  to  decelerate  the  projected 
increase in age-related expenditure. 

The  Maltese  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilize  the  debt  ratio  is  positive 
(1.4%  of  GDP),  below  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (5.7%  of  GDP)  is 
clearly above the EU average (3.2% of GDP). The 
long-term  cost  of  ageing  is  mainly  driven  by  an 
increase  in  pension  and  health-care  expenditure 
(by  5.1  p.p.  and  3.1  p.p.  of  GDP  respectively  in 
2060  relative  to  2010),  while  long-term  care  also 
contributes  less  but  still  significantly  to  the  long-
term cost of ageing increasing by 1.6 p.p. in 2060 
relative to 2010. 

In the 2006 Sustainability Report, the S2 gap was -
0.3%  of  GDP.  The  difference  between  that  report 
and the current results (7.3 p.p.) stems mainly from 
the  increase  in  the  long-term  cost  of  ageing  (4.6 
p.p.),  while  the  initial  budgetary  position  has 
deteriorated 
(1.6  p.p.).  The 
extension  of  the  projection  period  from  2050  (in 
the 
the  2006 
sustainability gap by 1.1 p.p. 

less  markedly 

to  2060 

increases 

report) 

The  Maltese  government  debt  in  2009,  the  base 
year of the analysis, stood at 67.0% of GDP and is 
forecast  to  increase  to  around  68%  of  GDP  in 
2010. The structural primary balance is forecast to 

124 

improve  from  -0.2%  in  2009  to  0.7%  in  2010. 
Currently,  Maltese  debt  is  below  the  EU  average 
but  above  the  60%  ceiling  set  by  the  Maastricht 
criteria. 

17.2.  OVERALL ASSESSMENT 

Malta appears to be at high risk with regard to the 
long-term  sustainability  of  public  finances.  The 
long-term  budgetary  impact  of  ageing  is  well 
above  the  EU  average,  mainly  as  a  result  of  a 
relatively high increase in pension and health-care 
expenditure  as  a  share  of  GDP  over  the  coming 
decades.  The  budgetary  position 
in  2009 
compounds  the  budgetary  impact  of  population 
ageing on the sustainability gap.  

High primary surpluses over the medium term and 
further reforms of the social security system aimed 
at  curbing  the  substantial  increase  in  age-related 
expenditures would contribute to reducing risks to 
the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.17.1: Determinants of fiscal sustainability (Malta) 

MT

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Malta 

Chapter VII 

Table VII.17.1:  Summary table (Malta) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

0.4
69.7
19.4
59.5
31.6
6.4
2.0

7.2
42.3
4.7
1.0
5.0
0.4

18.2

2008
-1.6
64.1

0.4
69.6
21.2
59.4
27.7
7.7
1.1

8.3
42.5
4.9
1.0
4.6
0.4

19.2

2009
-0.2
67.0

0.4
67.4
26.7
61.2
32.0
6.2
2.7

9.1
42.3
5.3
1.1
4.2
0.4

20.1

2010
0.7
68.9

0.4
65.1
31.2
63.0
38.1
6.2
2.7

9.3
39.8
5.6
1.2
4.0
0.3

20.5

2020

85.3

0.4
63.0
35.9
64.1
43.4
6.2
1.9

9.1
37.0
6.0
1.5
3.9
0.3

20.9

2025

97.1

0.4
61.8
39.1
65.1
50.6
6.2
1.7

9.3
37.4
6.4
1.6
3.9
0.3

21.7

2030

114.0

0.4
61.6
41.7
64.4
51.6
6.2
1.2

10.5
39.9
7.2
2.0
3.7
0.3

23.8

2040

173.7

0.4
58.4
49.8
64.4
51.1
6.2
0.8

12.0
41.0
7.6
2.2
3.7
0.3

25.8

0.4
54.9
59.1
64.4
50.3
6.2
1.0

13.4
40.0
8.0
2.6
4.0
0.3

28.4

0.0
-14.8
39.7
4.9
18.7
-0.2
-1.0

6.2
-2.3
3.3
1.6
-1.0
0.0

10.2

2050

2060

277.3

432.5

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

9.2
13.3

S1

4.7
8.8

S2

0.0
0.0

IBP

1.1
1.3

S1

9.2
13.3

DR

0.2
0.2

5.1
9.3

LTC

3.4
7.4

3.1
3.1

S2

7.0
11.2

1.6
1.6

IBP

1.4
1.5

-0.7
-0.7

S2

LTC

5.7
9.7

-0.1
-0.1

Cost of delay

RPB

0.6
1.0

6.3
7.3

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

7.0

0.5

Pure Ageing

0.3

Higher 
labour 
productivity
-0.4
Constant 
Health 
Status
-0.7

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

0.5

1.8

-0.5

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

-0.4

0.6

1.3

0.9

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.1

0.5

0.3

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

-0.3

6.0

IBP
1.6

LTC
4.6

Source:  Commission services. 

-1.0

2008

35.6

Average 2000-
07
33.5

125 

 
 
 
 
 
18. THE NETHERLANDS 

18.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,    Netherlands  has  a  sustainability  gap 
(S2) of 6.9% of GDP, which is slightly above the 
EU  average  (6.5%  of  GDP).    This  means  that  to 
put  public 
finances  on  a  sustainable  path, 
Netherlands  should  improve  its  structural  primary 
balance  in  a  durable  manner  by  6.9%  of  GDP.  In 
principle, this adjustment could take place via both 
an  increase  in  revenues  and  cuts  in  expenditure. 
Additionally,  the  social  protection  system  (in 
particular  public  pensions  and  long-term  care) 
would  have  to  be  reformed  to  decelerate  the 
projected increase in age-related expenditure. 

The  Dutch  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(1.9%  of  GDP),  below  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (5.0%  of  GDP)  is 
clearly above the EU average (3.2% of GDP). The 
long-term  cost  of  ageing  is  mainly  driven  by  an 
increase in long-term care and pension expenditure 
(by  4.6  p.p.  and  4.8  p.p.  respectively  in  2060 
relative to 2010), while health care also contributes 
less  but  still  significantly  to  the  long-term  cost  of 
ageing by increasing by 0.9 p.p. 

In the 2006 Sustainability Report, the S2 gap was 
1.3%  of  GDP.  The  difference  between  that  report 
and the current results (5.6 p.p.) stems mainly from 
the  deterioration  of  the  initial  budgetary  position 
(5.0  p.p.),  while  the  component  of  the  long-term 
cost  of  ageing  has  increased  less  markedly  (0.6 
p.p.).  The  extension of  the projection period  from 
2050  (in  the  2006  report)  to  2060  does  not  affect 
the sustainability gap. 

The Dutch government debt in 2009, the base year 
of  the  analysis,  stood  at  57.0%  of  GDP  and  is 
forecast  to  increase  to  around  63%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  slightly  from  0.0%  in  2009  to  -1.6%  in 

126 

2010. Currently, Dutch debt is both below the EU 
average and the 60% ceiling set by the Maastricht 
criteria,  however  the  decrease  of  its  structural 
primary  balance  may  widen  the  sustainability  gap 
of its public finances. 

18.2.  OVERALL ASSESSMENT 

The  Netherlands  appears  to  be  at  high  risk  with 
regard  to  the  long-term  sustainability  of  public 
finances.  The  long-term  budgetary  impact  of 
ageing is well above the EU average, mainly as a 
result  of  a  relatively  high  increase  in  pension  and 
long-term care expenditure as a share of GDP over 
the  coming  decades.  The  budgetary  position  in 
2009  compounds 
impact  of 
population ageing on the sustainability gap.  

the  budgetary 

High primary surpluses over the medium term and 
a  further  reform  of  the  social  security  system 
aimed  at  curbing  the  substantial  increase  in  age-
related  expenditures  would  contribute  to  reducing 
risks  to  the  long-term  sustainability  of  public 
finances. Reforms should however be pursued in a 
manner  that  do  not  amplify  the  fallouts  of  the 
current economic and financial crisis. 

Graph VII.18.1: Determinants of fiscal sustainability (The 

Netherlands) 

NL

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, The Netherlands 

Chapter VII 

Table VII.18.1:  Summary table (The Netherlands) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

16.4
67.4
21.5
78.7
53.3
3.2
1.7

6.6
43.8
4.8
3.4
4.6
1.1

20.5

2008
1.7
58.2

16.5
67.2
22.8
78.8
53.4
6.2
0.9

6.5
41.8
4.9
3.5
4.6
1.0

20.5

2009
0.0
57.0

16.7
65.6
27.1
79.4
55.3
3.0
1.7

7.2
41.6
5.1
3.8
4.5
1.0

21.5

2010
-1.6
63.1

16.9
64.5
30.7
79.5
56.1
3.0
1.5

7.8
41.1
5.3
4.1
4.4
1.0

22.6

2020

75.5

17.1
62.6
34.9
79.5
56.2
3.0
1.3

8.4
40.6
5.4
4.6
4.3
1.0

23.9

2025

93.9

17.2
60.2
40.0
79.7
55.8
3.0
1.2

9.3
40.4
5.6
5.4
4.4
1.0

25.6

2030

121.0

17.2
57.5
46.8
81.0
57.5
3.0
1.5

10.3
40.4
5.8
6.8
4.5
1.0

28.5

2040

202.2

16.9
58.4
45.6
80.4
57.8
3.0
1.5

10.3
40.7
5.9
7.7
4.5
1.0

29.4

16.6
57.8
47.2
80.2
57.6
3.0
1.3

10.5
40.5
5.8
8.1
4.4
1.0

29.9

0.2
-9.7
25.7
1.6
4.2
-0.2
-0.4

4.0
-3.2
1.0
4.7
-0.2
-0.1

9.4

2050

2060

312.1

450.3

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

6.7
7.3

S1

5.2
5.8

S2

2.7
2.7

IBP

1.6
1.6

S1

9.4
10.0

DR

0.0
0.0

4.0
4.3

LTC

3.7
4.1

0.9
0.9

S2

6.9
7.5

4.6
4.9

IBP

1.9
2.0

-0.2
0.0

S2

LTC

5.0
5.6

-1.4
-1.4

Cost of delay

RPB

0.6
0.6

6.5
6.9

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

6.9

0.2

Pure Ageing

0.1

Higher 
labour 
productivity
0.0
Constant 
Health 
Status
-0.4

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.4

1.1

-0.3

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

:

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.3

-0.3

0.5

1.1

0.9

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

1.3

7.0

IBP
5.0

LTC
0.6

Source:  Commission services. 

-3.3

2008

39.8

Average 2000-
07
39.3

127 

 
 
 
 
 
19. AUSTRIA 

19.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure Austria has a sustainability gap (S2) of 
4.7%  of  GDP,  which  is  below  the  EU  average 
(6.5%  of  GDP).  This  means  that  to  put  public 
finances  on  a  sustainable  path,  Austria  should 
improve its structural primary balance in a durable 
manner  by  4.7%  of  GDP.  In  principle,  this 
adjustment  could  take  place  via  an  increase  in 
revenues  or  cuts  in  expenditure.  Alternatively  the 
social  protection  system  would  have 
to  be 
reformed to decelerate the planned increase in age-
related expenditure. 

The Austrian sustainability gap is compounded by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(1.6%  of  GDP),  below  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (3.1%  of  GDP)  is 
close to the EU average (3.2% of GDP). The long-
term  cost  of  ageing  is  driven  by  an  increase  in 
pension, 
care 
expenditure  (by  1.0  p.p.,  1.4  p.p.  and  1.2  p.p. 
respectively in 2060 relative to 2010),  

health-care 

long-term 

and 

In the 2006 Sustainability Report, the S2 gap was 
0.3%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (4.4  p.p.)  stems  both  from 
the  deterioration  of  the  initial  budgetary  position 
(2.5 p.p.) and the increase in the long-term cost of 
ageing  (2.1  p.p.).  The  extension  of  the  projection 
period  from  2050  (in  the  2006  report)  decreases 
the sustainability gap by 0.1 p.p.  

The  Austrian  government  debt  in  2009,  the  base 
year of the analysis, stood at 70.4% of GDP and is 
forecast  to  increase  to  around  75%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  from  -0.2%  in  2009  to  -0.6%  in  2010. 
Austrian  debt  is  close  to  the  EU  average  but 
clearly above the 60% ceiling set by the Maastricht 
criteria  which  may  also  pose  risks  for  the  long-
term sustainability of its public finances. 

128 

19.2.  OVERALL ASSESSMENT 

Austria  appears  to  be  at  medium  risk  with  regard 
to  the  long-term  sustainability  of  public  finances. 
The  long-term  budgetary  impact  of  ageing  in 
Austria is close to the EU average. The budgetary 
position in 2009 compounds the budgetary impact 
of  population  ageing  on  the  sustainability  gap. 
Moreover, the current level of gross debt, which is 
above  the  Treaty  reference  value,  adds  to  the 
sustainability risk.  

In  addition,  there  is  a  risk  that  current  policy  will 
not be applicable for the long term as a decrease in 
pensions'  benefit  ratio  is  forecast  (from  55%  in 
2007  to  39%  in  2060).  This  decreasing  benefit 
ratio  may  put  some  pressure  on  Austrian  public 
finances and may thus pose risks to the long-term 
sustainability of public finances. 

Improving  primary  surpluses  over  the  medium 
term  and  further  reforms  to  the  social  security 
system aimed at curbing the increase in age-related 
expenditures would contribute to reducing risks to 
the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.19.1: Determinants of fiscal sustainability (Austria) 

AT

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Austria 

Chapter VII 

Table VII.19.1:  Summary table (Austria) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

8.3
67.5
25.0
74.8
40.0
4.4
1.6

12.8
54.9
6.5
1.3
4.8
0.7

26.0

2008
0.8
62.5

8.4
67.5
26.0
75.3
40.8
7.1
1.1

12.7
54.2
6.6
1.3
4.5
0.6

25.7

2009
-0.2
70.4

8.6
67.2
27.4
75.8
45.7
4.3
1.9

12.8
53.0
6.8
1.3
4.3
0.6

25.8

2010
-0.6
75.2

8.7
66.3
29.2
75.9
49.6
4.3
1.9

13.0
51.8
7.0
1.4
4.1
0.6

26.2

2020

84.8

8.9
64.6
32.7
75.7
51.1
4.3
1.6

13.4
50.6
7.2
1.5
4.1
0.6

26.9

2025

97.4

9.0
62.2
38.1
76.4
52.1
4.3
1.5

13.8
49.4
7.4
1.7
4.2
0.6

27.7

2030

116.7

9.1
59.2
46.0
77.9
56.1
4.3
1.5

13.9
46.3
7.8
2.0
4.2
0.6

28.6

2040

170.4

9.1
58.3
48.3
77.5
56.0
4.3
1.5

14.0
42.7
8.1
2.4
4.2
0.6

29.3

9.0
57.2
50.6
77.6
55.4
4.3
1.5

13.6
38.5
8.0
2.5
4.3
0.6

29.0

0.7
-10.3
25.6
2.8
15.4
-0.1
-0.1

0.9
-16.4
1.5
1.2
-0.5
0.0

3.1

2050

2060

245.3

337.8

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

4.0
5.3

S1

3.8
5.3

S2

S1

-0.7
-0.7

IBP

1.5
1.5

3.3
4.6

DR

0.2
0.2

1.0
2.1

LTC

2.2
3.6

1.4
1.4

S2

4.7
6.1

1.2
1.3

IBP

1.6
1.7

-0.2
-0.1

S2

LTC

3.1
4.4

-0.6
-0.6

Cost of delay

RPB

0.3
0.5

4.5
5.3

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

4.7

0.6

Pure Ageing

0.1

Higher 
labour 
productivity
-0.8
Constant 
Health 
Status
-0.6

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.5

-0.5

4.4

:

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.4

:

0.8

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.2

0.1

0.3

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

0.3

4.8

IBP
2.5

LTC
2.1

Source:  Commission services. 

-0.8

2008

44.5

Average 2000-
07
45.0

129 

 
 
 
 
 
 
20. POLAND 

20.1.  OVERVIEW OF THE RESULTS 

deficits  may  pose  some  risk  for  the  long-term 
sustainability of public finances. 

20.2.  OVERALL ASSESSMENT 

Poland appears to be at medium risk with regard to 
the long-term sustainability of public finances. The 
long-term budgetary impact of ageing is among the 
lowest  in  the  EU  but  the  budgetary  position  in 
2009  compounds 
impact  of 
population ageing on the sustainability gap.  

the  budgetary 

In  addition,  there  is  a  risk  that  current  policy  will 
not be applicable for the long terms as it involves a 
sharp  decrease  of  the  benefit  ratio  of  pensions  in 
Poland  until  2060,  which  may  pose  risks  to  the 
long term sustainability of public finances.  

Improving  primary  surpluses  over  the  medium 
term would contribute to reducing the risks to the 
finances. 
sustainability  of  public 
long-term 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.20.1: Determinants of fiscal sustainability (Poland) 

PL

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

in  age 

the  projected  changes 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure Poland has a sustainability gap (S2) of 
3.2% of GDP, which is significantly below the EU 
average  (6.5%  of  GDP).  This  means  that  to  put 
public  finances  on  a  sustainable  path,  Poland 
should improve its structural primary balance in a 
durable manner by 3.2% of GDP. In principle, this 
adjustment  could  take  place  via  an  increase  in 
revenues or cuts in expenditure.  

the  sustainability  gap 

The  Polish  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(4.4%  of  GDP),  above  the  EU  average  (3.3%  of 
GDP).  In  contrast, 
is 
mitigated  by  the  required  adjustment  given  the 
long-term  cost  of  ageing  is  negative  (-1.2%  of 
GDP) and clearly below the EU average (3.2% of 
GDP).  The  negative  long-term  cost  of  ageing  is 
in  pension 
mainly  driven  by  a  decrease 
expenditure (by -2.1 p.p. in 2060 relative to 2010), 
while health care and long-term care contribute to 
the long-term cost of ageing positively (increasing 
by 0.8% and 0.7% of GDP respectively). 

In the 2006 Sustainability Report, the S2 gap was  
-0.2% of GDP. The difference between that report 
and  the  current  results  (3.4  p.p.)  stems  from  both 
the  deterioration  of  the  initial  budgetary  position 
(1.9 p.p.) and the increase in the long-term cost of 
ageing  (1.5  p.p.).  The  extension  of  the  projection 
period  from  2050  (in  the  2006  report)  decreases 
the sustainability gap by 0.1 p.p.  

The Polish government debt in 2009, the base year 
of  the  analysis,  stood  at  53.6%  of  GDP  and  is 
forecast  to  increase  to  around  60%  of  GDP  in 
2010. The structural primary balance is forecast to 
improve  from  -3.1%  in  2009  to  -2.8%  in  2010. 
Polish debt is both below the EU average and the 
the  Maastricht  criteria. 
60%  ceiling  set  by 
large  continuing  structural  primary 
However 

130 

 
 
 
Sustainability assessment per Member State, Poland 

Chapter VII 

Table VII.20.1:  Summary table (Poland) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

38.1
70.8
19.0
63.3
32.1
9.6
4.9

11.6
56.2
4.0
0.4
4.4
0.1

20.5

2008
-3.1
47.2

38.1
71.5
19.0
64.0
33.0
12.1
3.2

10.8
59.4
4.1
0.4
3.7
0.1

19.1

2009
-3.1
53.6

38.1
70.0
21.9
65.1
35.5
5.9
3.1

9.6
53.7
4.3
0.4
3.3
0.1

17.6

2010
-2.8
59.7

38.0
67.0
27.2
66.1
34.9
5.9
2.5

9.7
50.9
4.4
0.5
3.2
0.1

17.8

2020

80.4

37.6
64.6
32.9
67.6
41.8
5.9
2.5

9.7
47.7
4.5
0.5
3.2
0.1

18.0

2025

93.6

37.0
63.9
36.0
67.6
48.1
5.9
2.0

9.4
43.7
4.6
0.6
3.2
0.1

17.9

2030

108.9

35.2
62.7
41.3
65.4
47.9
5.9
0.5

9.2
35.9
4.8
0.7
2.9
0.1

17.7

2040

155.7

33.3
56.8
55.7
65.5
46.2
5.9
0.3

9.1
28.6
4.9
0.9
2.9
0.1

17.9

31.1
52.5
69.0
66.3
46.5
5.9
0.5

8.8
23.6
5.0
1.1
3.2
0.1

18.1

-7.0
-18.3
50.0
3.0
14.4
-3.7
-4.4

-2.8
-32.6
1.0
0.7
-1.2
-0.1

-2.4

2050

2060

225.5

318.4

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

-1.2
-1.5

S1

2.9
2.9

S2

0.1
0.1

IBP

4.2
4.2

S1

-1.1
-1.4

DR

0.0
0.0

-2.1
-2.2

LTC

-1.2
-1.4

0.8
0.8

S2

3.2
3.1

0.7
0.7

IBP

4.4
4.5

-0.6
-0.7

S2

LTC

-1.2
-1.4

-0.4
-0.4

Cost of delay

RPB

0.3
0.3

1.1
0.9

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

3.2

0.4

Pure Ageing

0.2

Higher 
labour 
productivity
-0.3
Constant 
Health 
Status
-0.9

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.1

0.0

0.5

0.4

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.2

0.5

2.1

0.9

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.2

0.0

0.1

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

-0.2

3.3

IBP
1.9

LTC
1.5

Source:  Commission services. 

-0.4

2008

34.4

Average 2000-
07
33.1

131 

 
 
 
 
 
21. PORTUGAL 

21.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure  Portugal  has  a  sustainability  gap  (S2) 
of 5.5% of GDP, which is  below the EU average 
(6.5%  of  GDP).  This  means  that  to  put  public 
finances  on  a  sustainable  path,  Portugal  should 
improve its structural primary balance in a durable 
manner  by  5.5%  of  GDP.  In  principle,  this 
adjustment  could  take  place  via  an  increase  in 
revenues  or  cuts  in  expenditure.  Alternatively  the 
social  protection  system  would  have 
to  be 
reformed to decelerate the planned increase in age-
related expenditure. 

The  Portuguese  sustainability  gap  is  compounded 
by  the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(3.7%  of  GDP),  above  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (1.9%  of  GDP)  is 
below  the  EU  average  (3.2%  of  GDP).  The  long-
term cost of ageing is mainly driven by an increase 
in  public  pension  and  health  care  expenditure  (by 
1.5  p.p.  and  1.8  p.p.  respectively  in  2060  relative 
to  2010),  while  long-term  care  contributes  to  the 
long-term  cost  of  ageing  by  a  lesser  amount 
(increasing by 0.1 p.p.). 

In the 2006 Sustainability Report, the S2 gap was 
10.5% of GDP. The difference between that report 
and  the  current  results  (4.9  p.p.)  stems  from  the 
decrease in the long-term cost of ageing (-5.1 p.p.), 
at the same time, the initial budgetary position has 
remained  stable.  The  extension  of  the  projection 
period from 2050 (in the 2006 report) increases the 
sustainability gap by 0.1 p.p.  

The Portuguese government debt in 2009, the base 
year of the analysis, stood at 75.4% of GDP and is 
forecast  to  increase  to  around  81%  of  GDP  in 
2010. The structural primary balance is forecasted 
to improve from -2.4% in 2009 to -1.8% in 2010. 
Portuguese debt is above both the EU average and 
the  60%  ceiling  set  by  the  Maastricht  criteria 

132 

which  may  together  with  the  ongoing  structural 
primary  deficits  pose  risks  for  the  long-term 
sustainability of public finances. 

21.2.  OVERALL ASSESSMENT 

Portugal appears to be at medium risk with regard 
to  the  long-term  sustainability  of  public  finances. 
While the long-term budgetary impact of ageing is 
somewhat  higher  than  on  average  in  the  EU, 
enacted pension reforms have helped to contain the 
projected increase in pension expenditure over the 
coming  decades.  The  budgetary  position  in  2009 
compounds  the  budgetary  impact  of  population 
ageing. Moreover, the current level of gross debt is 
above the Treaty reference value.  

In  addition  to  overall  figures,  there  is  a  risk  that 
current  policy  will  not  be  applicable  for  the  long 
term as the benefit ratio of pensions is forecast to 
decrease. This might put some additional pressure 
on the long term sustainability of public finances. 

Improving  primary  surpluses  over  the  medium 
term  and  further  reforms  to  the  social  security 
system aimed at curbing the increase in age-related 
expenditures would contribute to reducing risks to 
the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.21.1: Determinants of fiscal sustainability (Portugal) 

PT

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Portugal 

Chapter VII 

Table VII.21.1:  Summary table (Portugal) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

10.6
67.3
25.6
74.1
54.5
8.1
0.4

11.4
46.3
7.2
0.1
4.6
1.2

24.5

2008
-0.9
66.4

10.7
66.9
26.6
75.2
56.9
9.8
0.1

11.9
49.0
7.3
0.1
4.5
1.1

24.9

2009
-2.4
75.4

10.9
66.1
28.6
76.1
61.1
6.9
2.1

12.1
48.2
7.5
0.1
4.4
1.0

25.0

2010
-1.8
81.5

11.1
65.5
30.7
76.1
63.5
6.2
2.1

12.4
47.2
7.6
0.1
4.3
0.9

25.2

11.2
64.7
33.2
76.3
65.0
6.2
2.1

12.6
45.3
7.8
0.1
4.2
0.8

25.5

2020

113.6

2025

134.2

11.3
63.5
36.6
76.4
67.0
6.2
2.5

12.6
42.3
8.0
0.1
4.1
0.8

25.7

2030

156.1

11.5
60.2
44.6
76.4
67.4
6.2
1.8

12.5
36.7
8.5
0.1
4.0
0.8

26.0

2040

203.9

11.4
56.9
53.0
76.6
67.5
6.2
1.2

13.3
34.5
8.9
0.2
4.2
0.8

27.4

11.3
56.3
54.8
76.3
67.8
6.2
1.4

13.4
32.7
9.1
0.2
4.3
0.8

27.8

0.7
-10.9
29.1
2.2
13.3
-1.9
1.0

2.1
-13.6
1.9
0.1
-0.3
-0.4

3.4

2050

2060

282.9

389.9

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

2.8
4.2

S1

4.7
5.9

S2

0.1
0.1

IBP

3.4
3.6

S1

2.9
4.3

DR

0.3
0.3

1.5
2.6

LTC

1.0
2.1

1.8
1.7

S2

5.5
6.8

0.1
0.1

IBP

3.7
3.8

-0.4
-0.2

S2

LTC

1.9
3.1

-0.2
-0.2

Cost of delay

RPB

0.4
0.5

3.0
4.2

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

5.5

0.7

Pure Ageing

0.2

Higher 
labour 
productivity
-0.5
Constant 
Health 
Status
-0.7

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.4

3.0

0.3

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.5

:

0.8

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.0

0.1

0.0

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

10.5

5.4

IBP
0.0

LTC
-5.1

Source:  Commission services. 

-0.1

2008

37.8

Average 2000-
07
36.0

133 

 
 
 
 
 
EU  average  according  to  the  projections  made  in 
2009.  The budgetary  position  in  2009  compounds 
the  budgetary  impact  of  population  ageing  on  the 
sustainability gap.  

Improving  the  primary  balance  over  the  medium 
term  and  further  reforms  to  the  social  security 
system  would  contribute  to  reducing  risks  to  the 
finances. 
sustainability  of  public 
long-term 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.22.1: Determinants of fiscal sustainability (Romania) 

RO

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

22. ROMANIA 

22.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,    Romania  has  a  sustainability  gap 
(S2) of 9.1% of GDP, which is significantly above 
the  EU  average  (6.5%  of  GDP).    This  means  that 
to  put  public  finances  on  a  sustainable  path, 
Romania  should  improve  its  structural  primary 
balance  in  a  durable  manner  by  9.1%  of  GDP.  In 
principle, this adjustment could take place via both 
an  increase  in  revenues  and  cuts  in  expenditure. 
Alternatively,  the  social  protection  system  (in 
particular  public  pensions  and  health  care)  would 
have  to  be  reformed  to  decelerate  the  projected 
increase in age-related expenditure. 

The  Romanian  sustainability  gap  is  compounded 
by  the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(4.3%  of  GDP),  above  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the long-term cost of ageing (4.9% of GDP) is also 
above  the  EU  average  (3.2%  of  GDP).  The  long-
term cost of ageing is mainly driven by an increase 
in pension expenditure (by 7.4 p.p. in 2060 relative 
to  2010),  while  health  care  also  contributes  to  the 
long-term cost of ageing (increasing by 1.3 p.p.). 

The Romanian government debt in 2009, the base 
year of the analysis, stood at 18.2% of GDP and is 
forecast  to  increase  to  around  23%  of  GDP  in 
2010. The structural primary balance is forecast to 
improve  slightly  from  -3.7%  in  2009  to  -3.1%  in 
2010.  Romanian  debt  is  both  below  the  EU 
average and the 60% ceiling set by the Maastricht 
criteria, however the continuing structural primary 
deficits  may  widen  the  sustainability  gap  of  its 
public finances. 

22.2.  OVERALL ASSESSMENT 

Romania appears to be at high risk with regard to 
the long-term sustainability of public finances. The 
long-term budgetary impact of ageing is above the 

134 

 
 
 
 
Sustainability assessment per Member State, Romania 

Chapter VII 

Table VII.22.1:  Summary table (Romania) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

21.6
69.8
21.3
63.0
42.4
6.4
5.1

6.6
29.4
3.5
0.0
2.8
0.2

13.1

2008
-7.2
13.6

21.3
70.0
21.3
63.9
44.6
7.7
3.2

8.4
40.0
3.6
0.0
2.5
0.2

14.7

2009
-3.7
18.2

21.1
69.4
22.5
64.7
46.3
6.0
3.9

8.5
41.4
3.7
0.0
2.4
0.2

14.8

2010
-3.1
22.7

20.8
67.9
25.7
64.8
47.1
6.0
2.9

8.8
42.2
3.8
0.0
2.3
0.2

15.1

2020

66.3

20.5
66.7
29.1
64.2
50.9
6.0
2.2

9.4
42.5
3.9
0.0
2.3
0.2

15.8

2025

91.3

20.0
66.8
30.3
62.4
48.2
6.0
1.6

10.4
42.5
4.1
0.0
2.2
0.2

17.0

2030

125.1

19.2
62.6
40.7
60.8
45.6
6.0
1.1

12.6
39.0
4.4
0.0
2.1
0.2

19.3

2040

220.6

18.1
57.3
54.0
60.5
44.2
6.0
0.3

14.8
36.6
4.7
0.0
2.2
0.2

22.0

16.9
53.6
65.3
61.3
45.4
6.0
0.3

15.8
36.6
4.9
0.0
2.3
0.2

23.2

-4.6
-16.2
44.0
-1.7
3.1
-0.4
-4.7

9.2
7.2
1.4
0.0
-0.5
0.0

10.1

2050

2060

390.4

633.8

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

8.5
9.6

S1

6.9
7.6

S2

0.0
0.0

IBP

4.1
4.2

S1

8.5
9.6

DR

-0.4
-0.4

7.4
8.5

LTC

3.2
3.8

1.3
1.3

S2

9.1
9.9

0.0
0.0

IBP

4.3
4.3

-0.2
-0.1

S2

LTC

4.9
5.6

-0.1
-0.2

Cost of delay

RPB

0.8
0.9

5.4
6.0

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

9.1

0.5

Pure Ageing

0.0

Higher 
labour 
productivity
0.0
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.3

0.5

0.3

-0.7

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.0

0.3

2.1

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.0

0.0

0.0

0.0

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

:

8.7

IBP
:

LTC
:

Source:  Commission services. 

2008

29.5

Average 2000-
07
28.9

135 

 
 
 
 
 
23. SLOVENIA 

23.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Slovenia has a sustainability gap (S2) 
of  12.2%  of  GDP,  which  is  clearly  above  the  EU 
average  (6.5%  of  GDP).    This  means  that  to  put 
public  finances  on  a  sustainable  path,  Slovenia 
should improve its structural primary balance in a 
durable  manner  by  12.2%  of  GDP.  In  principle, 
this  adjustment  could  take  place  via  both  an 
increase  in  revenues  and  cuts  in  expenditure. 
Additionally,  the  social  protection  system  (in 
particular  public  pensions  and  health  and  long-
term care) would have to be reformed to decelerate 
the projected increase in age-related expenditure. 

The  Slovenian  sustainability  gap  is  compounded 
by  the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(3.9%  of  GDP),  above  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (8.3%  of  GDP)  is 
clearly above the EU average (3.2% of GDP). The 
long-term  cost  of  ageing  is  mainly  driven  by  an 
increase  in  pension  expenditure  (by  8.5  p.p.  in 
2060 relative to 2010), while health care and long-
term care also contribute less but still significantly 
to the long-term cost of ageing (both increasing by 
1.7p.p.). 

 In the 2006 Sustainability Report, the S2 gap was 
7.3%  of  GDP.  The  difference  between  that  report 
and the current results (4.9 p.p.) stems mainly from 
the  deterioration  of  the  initial  budgetary  position 
(3.8  p.p.),  while  the  component  of  the  long-term 
cost  of  ageing  has  increased  less  markedly  (0.6 
p.p.).  The  extension of  the projection period  from 
2050  (in  the  2006  report)  to  2060  increases  the 
sustainability gap by 0.6 p.p. 

The  Slovenian  government  debt  in 2009,  the  base 
year of the analysis, stood at 29.3% of GDP and is 
forecast  to  increase  to  around  35%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  slightly  from  -3.3%  in  2009  to  -3.4%  in 

136 

2010. Slovenian debt is both below the EU average 
and the 60% ceiling set by the Maastricht criteria, 
however  the  decrease  of  its  structural  primary 
balance  may  widen  the  sustainability  gap  of  its 
public finances.  

23.2.  OVERALL ASSESSMENT 

Slovenia  appears  to  be  at  high  risk with  regard  to 
the long-term sustainability of public finances. The 
long-term  budgetary  impact  of  ageing  is  well 
above  the  EU  average,  mainly  as  a  result  of  a 
relatively high increase in pension expenditure as a 
share  of  GDP  over  the  coming  decades.  The 
budgetary  position 
the 
budgetary  impact  of  population  ageing  on  the 
sustainability gap.  

in  2009  compounds 

High primary surpluses over the medium term and 
a  further  pension  reform  aimed  at  curbing  the 
substantial  increase  in  age-related  expenditures 
would contribute to reducing risks to the long-term 
sustainability  of  public  finances.  Reforms  should 
however  be  pursued  in  a  manner  that  do  not 
amplify  the  fallouts  of  the  current  economic  and 
financial crisis. 

Graph VII.23.1: Determinants of fiscal sustainability (Slovenia) 

SI

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Slovenia 

Chapter VII 

Table VII.23.1:  Summary table (Slovenia) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

2.0
70.1
22.7
71.4
34.5
4.9
3.9

9.9
40.9
6.6
1.1
5.1
0.2

22.9

2008
-1.3
22.8

2.0
69.5
23.9
71.8
36.7
7.4
2.2

10.1
40.7
6.8
1.2
4.8
0.2

23.1

2009
-3.3
29.3

2.1
68.1
26.2
72.5
42.9
4.7
3.2

10.6
39.9
7.1
1.3
4.8
0.2

24.0

2010
-3.4
34.9

2.1
65.4
31.2
73.4
48.8
4.7
2.6

11.1
39.0
7.3
1.4
4.9
0.2

24.9

2020

74.0

2.0
63.5
36.2
72.6
49.5
4.7
1.4

12.0
38.2
7.5
1.6
5.0
0.2

26.2

2.0
61.9
40.8
71.7
49.5
4.7
0.8

13.3
38.1
7.8
1.8
5.0
0.2

28.0

2025

108.6

2030

158.8

2.0
58.9
49.4
70.8
49.3
4.7
0.7

16.1
38.4
8.2
2.2
5.0
0.2

31.7

2040

311.1

1.9
54.7
59.4
71.6
48.3
4.7
0.8

18.2
38.6
8.4
2.6
5.3
0.2

34.8

1.8
53.8
62.2
71.9
49.1
4.7
1.1

18.6
38.6
8.5
2.9
5.6
0.2

35.8

-0.2
-16.4
39.5
0.6
14.6
-0.2
-2.8

8.8
-2.3
1.9
1.8
0.4
0.0

12.8

2050

2060

540.2

831.6

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

12.5
15.8

S1

9.2
11.8

S2

0.1
0.1

IBP

3.8
3.9

S1

12.7
15.9

DR

-0.3
-0.3

8.5
11.7

LTC

5.7
8.2

1.7
1.6

S2

12.2
15.1

1.7
1.8

IBP

3.9
4.0

0.7
0.8

S2

LTC

8.3
11.1

-0.1
-0.2

Cost of delay

1.1
1.4

RPB

8.4
10.5

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

12.2

0.1

Pure Ageing

0.0

Higher 
labour 
productivity
-0.3
Constant 
Health 
Status
-0.6

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.5

-0.2

1.0

:

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

-0.1

0.4

0.4

1.4

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.2

0.4

0.2

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

7.3

11.6

IBP
3.8

LTC
0.6

Source:  Commission services. 

-1.1

2008

38.0

Average 2000-
07
38.4

137 

 
 
 
 
 
24. SLOVAKIA 

24.1.  OVERVIEW OF THE RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Slovakia has a sustainability gap (S2) 
of  7.4%  of  GDP,  which  is  above  the  EU  average 
(6.5%  of  GDP).    This  means  that  to  put  public 
finances  on  a  sustainable  path,  Slovakia  should 
improve its structural primary balance in a durable 
manner  by  7.4%  of  GDP.  In  principle,  this 
adjustment could take place via both an increase in 
revenues  and  cuts  in  expenditure.  Alternatively, 
the  social  protection  system  (in  particular  public 
pensions  and  health  care)  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

The  Slovak  sustainability  gap  is  compounded  by 
the  initial  budgetary  position,  i.e.  the  required 
adjustment  to  stabilise  the  debt  ratio  is  positive 
(4.5%  of  GDP),  above  the  EU  average  (3.3%  of 
GDP).  In  parallel,  the  required  adjustment  given 
the  long-term  cost  of  ageing  (2.9%  of  GDP)  is 
slightly below the EU average (3.2% of GDP). The 
long-term  cost  of  ageing  is  mainly  driven  by  an 
increase  in  pension  expenditure  (by  3.6  p.p.  in 
2060  relative  to  2010),  while  health  care  also 
contributes 
long-term  cost  of  ageing 
(increasing by 2.1 p.p.). 

the 

to 

In the 2006 Sustainability Report, the S2 gap was 
3.0%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (4.4  p.p.)  stems  from  the 
deterioration  of  the  initial  budgetary  position  (3.7 
p.p.), while the component of the long-term cost of 
ageing has increased less markedly (0.2 p.p.). The 
extension  of  the  projection  period  from  2050  (in 
the  2006 
the 
sustainability gap by 0.5 p.p. 

to  2060 

increases 

report) 

The  Slovak  government  debt  in  2009,  the  base 
year of the analysis, stood at 32.3% of GDP and is 
forecast  to  increase  to  around  36%  of  GDP  in 
2010. The structural primary balance is forecast to 
improve  slightly  from  -3.7%  in  2009  to  -3.3%  in 
2010.  Slovak  debt  is  both  below  the  EU  average 

138 

and the 60% ceiling set by the Maastricht criteria, 
however the continuing structural primary deficits 
may  widen  the  sustainability  gap  of  its  public 
finances. 

24.2.  OVERALL ASSESSMENT 

Slovakia  appears  to  be  at  high  risk with  regard  to 
the long-term sustainability of public finances. The 
long-term  budgetary  impact  of  ageing,  which  is 
slightly below the EU average, is mainly due to a 
relatively  high  increase  in  pension  expenditure 
during the coming decades. The budgetary position 
in  2009  compounds  the  budgetary  impact  of 
population ageing. 

Improving  the  primary  balance  over  the  medium 
term  and  further  reforms  to  the  social  security 
system  would  contribute  to  reducing  risks  to  the 
long-term 
finances. 
sustainability  of  public 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.24.1: Determinants of fiscal sustainability (Slovakia) 

SK

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

 
 
 
Sustainability assessment per Member State, Slovakia 

Chapter VII 

Table VII.24.1:  Summary table (Slovakia) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

5.4
72.0
16.5
68.8
39.4
11.1
5.6

6.8
45.2
5.0
0.2
3.1
0.1

15.2

2008
-3.5
27.6

5.4
72.5
16.9
70.3
47.0
12.1
3.9

6.6
45.8
5.2
0.2
2.8
0.1

14.9

2009
-3.7
32.2

5.4
71.5
19.2
71.8
49.6
8.6
4.2

6.3
44.5
5.4
0.2
2.4
0.1

14.5

2010
-3.3
36.3

5.4
69.0
23.8
72.9
50.3
6.2
3.4

6.3
43.3
5.7
0.2
2.2
0.1

14.5

2020

64.9

5.4
67.0
28.5
73.4
53.4
6.2
2.3

6.9
42.2
6.0
0.3
2.2
0.1

15.4

2025

87.0

5.3
65.9
32.3
72.8
55.1
6.2
2.0

7.3
41.0
6.2
0.3
2.2
0.1

16.1

2030

115.5

5.1
63.4
40.0
70.5
53.8
6.2
0.5

8.3
37.9
6.7
0.4
2.1
0.1

17.5

2040

207.5

4.9
57.0
55.5
70.4
52.6
6.2
0.2

9.4
34.9
7.1
0.5
2.1
0.1

19.2

4.5
52.7
68.5
71.2
52.8
6.2
0.5

10.2
33.1
7.2
0.6
2.3
0.1

20.4

-0.8
-19.3
52.0
2.4
13.4
-4.9
-5.1

3.4
-12.0
2.3
0.4
-0.8
-0.1

5.2

2050

2060

354.6

561.2

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

5.5
5.4

S1

5.7
5.8

S2

0.0
0.0

IBP

4.3
4.4

S1

5.5
5.4

DR

-0.3
-0.3

3.6
3.5

LTC

1.6
1.7

2.1
2.0

S2

7.4
7.4

0.4
0.4

IBP

4.5
4.6

-0.6
-0.5

S2

LTC

2.9
2.8

-0.4
-0.4

Cost of delay

RPB

0.7
0.7

4.0
3.9

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

7.4

0.4

Pure Ageing

0.0

Higher 
labour 
productivity
-0.1
Constant 
Health 
Status
-0.7

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.1

0.3

0.4

-0.4

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

-0.1

0.4

1.0

0.6

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.1

0.0

0.0

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

3.0

6.9

IBP
3.7

LTC
0.2

Source:  Commission services. 

-0.2

2008

29.4

Average 2000-
07
32.1

139 

 
 
 
 
 
25. FINLAND 

25.1.  OVERVIEW OF THE RESULTS 

2010.  Finnish  debt  is  both  below  the  EU  average 
and the 60% ceiling set by the Maastricht criteria.  

25.2.  OVERALL ASSESSMENT 

Finland appears to be at low risk with regard to the 
long-term  sustainability  of  public  finances.  While 
the long-term budgetary impact of ageing is higher 
than on average in the EU, the budgetary position 
in  2009  with  a  structural  surplus  together  with 
large  assets  accumulated  in  the  public  pension 
system significantly offset the long-term budgetary 
impact of ageing.  

Improving  primary  surpluses  over  the  medium 
term  and  further  reforms  to  the  social  security 
system aimed at curbing the increase in age-related 
expenditures would contribute to reducing risks to 
the  long-term  sustainability  of  public  finances. 
Reforms  should  however  be  pursued  in  a  manner 
that  do  not  amplify  the  fallouts  of  the  current 
economic and financial crisis. 

Graph VII.25.1: Determinants of fiscal sustainability (Finland) 

FI

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Finland has a sustainability gap (S2) 
of 4.0% of GDP, which is significantly below the 
EU  average  (6.5%  of  GDP).    This  means  that  to 
put  public  finances  on  a  sustainable  path,  Finland 
should improve its structural primary balance in a 
durable manner by 4.0% of GDP. In principle, this 
adjustment could take place via both an increase in 
revenues  and  cuts  in  expenditure.  Alternatively, 
the  social  protection  system  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

In  parallel, 

(3.3%  of  GDP). 

The Finnish sustainability gap is mainly due to the 
required  adjustment  given  the  long-term  cost  of 
ageing  (4.5%  of  GDP),  which  is  above  the  EU 
average 
the 
sustainability  gap  is  mitigated  by  the  initial 
budgetary  position,  i.e.  the  required  adjustment  to 
stabilise the debt ratio is negative (-0.5% of GDP) 
clearly below the EU average (3.2% of GDP). The 
increase in the long-term cost of ageing is mainly 
driven by pension  and  long-term  care  expenditure 
(increasing by 2.6 p.p. and 2.5 p.p. respectively in 
2060  relative  to  2010),  while  the  ratio  of  health 
care expenditure to GDP increases by 0.8 p.p.  

In the 2006 Sustainability Report, the S2 gap was  
-0.9% of GDP. The difference between that report 
and the current results (4.9 p.p.) stems mainly from 
the  deterioration  of  the  initial  budgetary  position 
(4.6  p.p.),  while  the  component  of  the  long-term 
cost  of  ageing  has  increased  by  0.1  p.p.  The 
extension  of  the  projection  period  from  2050  (in 
the  2006 
the 
sustainability gap by 0.2 p.p. 

to  2060 

increases 

report) 

The  Finnish  government  debt  in  2009,  the  base 
year of the analysis, stood at 39.7% of GDP and is 
forecast  to  increase  to  around  46%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  slightly  from  2.1%  in  2009  to  0.8%  in 

140 

 
 
 
 
 
 
Sustainability assessment per Member State, Finland 

Chapter VII 

Table VII.25.1:  Summary table (Finland) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

5.3
66.5
24.8
75.8
59.4
6.9
2.4

10.0
49.1
5.5
1.8
5.7
1.2

24.2

2008
4.3
33.4

5.3
66.4
25.7
75.3
57.9
9.3
1.1

10.7
51.2
5.6
1.9
5.4
1.0

24.7

2009
2.1
39.7

5.4
63.4
31.7
77.0
61.9
5.8
1.9

11.8
52.0
5.8
2.2
5.3
1.0

26.0

2010
0.8
45.7

5.5
61.0
36.8
78.4
66.5
5.8
1.7

12.6
52.1
6.0
2.4
5.2
1.0

27.2

2020

35.5

5.5
59.3
40.6
78.5
67.0
5.8
1.5

13.4
52.0
6.1
2.7
5.3
1.0

28.5

2025

44.4

5.6
58.2
43.9
78.6
66.1
5.8
1.5

13.9
51.7
6.3
3.1
5.4
1.0

29.7

2030

61.3

5.5
58.2
45.1
78.8
67.8
5.8
1.6

13.6
50.2
6.5
3.9
5.4
1.0

30.4

2040

111.1

5.4
57.5
46.6
79.1
68.5
5.8
1.5

13.3
48.3
6.5
4.2
5.3
1.0

30.2

5.4
56.4
49.3
79.1
67.7
5.8
1.5

13.4
46.9
6.5
4.4
5.4
1.0

30.5

0.1
-10.0
24.5
3.3
8.3
-1.1
-0.9

3.3
-2.3
1.0
2.6
-0.3
-0.2

6.3

2050

2060

172.6

248.7

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

5.4
5.7

S1

2.6
3.1

S2

0.5
0.5

IBP

-0.8
-0.8

S1

5.9
6.1

DR

-0.3
-0.3

2.6
2.8

LTC

3.7
4.2

0.8
0.8

S2

4.0
4.5

2.5
2.6

IBP

-0.5
-0.4

0.0
0.0

S2

LTC

4.5
4.9

-1.5
-1.5

Cost of delay

RPB

0.3
0.3

5.5
5.8

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

4.0

0.6

Pure Ageing

0.3

Higher 
labour 
productivity
-0.3
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.3

0.9

-0.2

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.2

0.5

:

0.8

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.1

-0.1

0.2

0.9

0.4

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

-0.9

3.8

IBP
4.6

LTC
0.1

Source:  Commission services. 

-1.9

2008

42.8

Average 2000-
07
44.5

141 

 
 
 
 
 
26. SWEDEN 

26.1.  OVERVIEW OF THE RESULTS 

Swedish  debt  is  both  below  the  EU  average  and 
the 60% ceiling set by the Maastricht criteria.  

26.2.  OVERALL ASSESSMENT 

Sweden appears to be at low risk with regard to the 
long-term  sustainability  of  public  finances.  The 
long-term  budgetary  impact  of  ageing  is  lower 
than  the  EU  average.  The  budgetary  position  in 
2009  with  a  primary  surplus  contributes  to  the 
reduction of gross debt and a considerable amount 
of  public  assets  will  help  finance  part  of  the 
increase in pension expenditure.  

Maintaining  sound  government  finances  with 
continued  surpluses  would  contribute  to  limiting 
risks  to  the  long-term  sustainability  of  public 
finances. Reforms should however be pursued in a 
manner  that  do  not  amplify  the  fallouts  of  the 
current economic and financial crisis. 

Graph VII.26.1: Determinants of fiscal sustainability (Sweden) 

SE

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Source: Commission services. 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure,  Sweden has a sustainability gap (S2) 
of 1.4% of GDP, which is significantly below the 
EU  average  (6.5%  of  GDP).    This  means  that  to 
put public finances on a sustainable path, Sweden 
should improve its structural primary balance in a 
durable manner by 1.4% of GDP. In principle, this 
adjustment could take place via both an increase in 
revenues  and  cuts  in  expenditure.  Alternatively, 
the  social  protection  system  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

The  Swedish  sustainability  gap  is  mainly  due  to 
required  adjustment  given  the  long-term  cost  of 
ageing  (1.6%  of  GDP),  which  is  below  the  EU 
average  (3.3%  of  GDP).  In  parallel,  the  initial 
budgetary  position,  i.e.  the  required  adjustment  to 
stabilise  the  debt  ratio  is  positive  (0.2%  of  GDP) 
and clearly below the EU average (3.2% of GDP). 
The  increase  in  the  long-term  cost  of  ageing  is 
mainly  driven  by  long-term  care  expenditure 
(increasing  by  2.2  p.p.  in  2060  relative  to  2010), 
while  the  ratio  of health  care  expenditure  to  GDP 
increases  by  0.7  p.p.  At  the  same  time,  the  GDP 
share of pension expenditure is expected to fall by 
0.2 p.p. 

In the 2006 Sustainability Report, the S2 gap was  
-1.1% of GDP. The difference between that report 
and the current results (2.9 p.p.) stems mainly from 
the  deterioration  of  the  initial  budgetary  position 
(3.3  p.p.),  while  the  component  of  the  long-term 
cost  of  ageing  has  decreased  by  0.8  p.p.  The 
extension  of  the  projection  period  from  2050  (in 
the  2006 
the 
sustainability gap by 0.5 p.p. 

to  2060 

increases 

report) 

The  Swedish  government  debt  in  2009,  the  base 
year of the analysis, stood at 44.0% of GDP and is 
forecast  to  increase  to  around  48%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  from  0.9%  in  2009  to  -0.5%  in  2010. 

142 

 
 
 
Sustainability assessment per Member State, Sweden 

Chapter VII 

Change      

2007 - 2060

1.8
-8.7
20.3
3.3
3.4
-0.2
-0.9

-0.1
-19.1
0.8
2.3
-0.3
-0.1

2.6

Table VII.26.1:  Summary table (Sweden) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

9.1
65.6
26.4
79.2
73.2
6.1
2.6

9.5
49.3
7.2
3.5
6.0
0.9

27.2

2008
3.4
38.0

9.3
65.3
27.8
79.9
73.1
10.4
0.4

9.6
48.1
7.3
3.5
5.8
0.9

27.1

2009
0.9
44.0

9.6
63.1
31.5
81.9
75.0
5.9
2.2

9.5
44.7
7.4
3.5
5.5
0.9

26.7

2010
-0.5
47.2

9.9
61.8
33.7
82.2
75.5
5.9
1.9

9.4
41.0
7.5
3.7
5.5
0.9

26.9

2020

31.4

10.1
60.9
35.5
82.0
75.9
5.9
1.9

9.4
38.6
7.6
4.0
5.6
0.9

27.5

2025

29.9

10.3
60.2
37.4
81.9
75.5
5.9
1.7

9.5
36.6
7.7
4.4
5.7
0.9

28.2

2030

32.2

10.5
59.5
40.8
82.0
76.0
5.9
1.9

9.4
33.5
7.9
5.0
5.7
0.9

28.8

2040

45.7

10.7
59.0
41.9
82.4
77.1
5.9
1.7

9.0
31.4
8.0
5.3
5.6
0.9

28.8

2050

64.0

10.9
56.9
46.7
82.5
76.6
5.9
1.7

9.4
30.1
8.0
5.8
5.8
0.9

29.7

2060

93.1

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

2.4
4.0

S1

0.5
1.9

S2

0.3
0.3

IBP

-0.1
0.0

S1

2.7
4.3

DR

-0.3
-0.3

-0.2
0.4

LTC

0.8
2.1

0.7
0.6

S2

1.8
3.4

2.2
2.8

IBP

0.2
0.2

0.0
0.5

S2

LTC

1.6
3.1

-0.8
-0.8

Cost of delay

RPB

0.1
0.2

3.1
4.4

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

1.8

0.3

Pure Ageing

0.1

Higher 
labour 
productivity
-0.1
Constant 
Health 
Status
-0.5

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.2

-0.3

1.5

-0.1

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

0.1

0.3

:

0.7

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.2

-0.2

0.4

0.8

0.6

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

-1.1

1.4

IBP
3.3

LTC
-0.8

Source:  Commission services. 

-1.7

2008

47.9

Average 2000-
07
49.8

143 

 
 
 
 
 
 
Maastricht  criteria,  however  the  dramatic  size  of 
its  structural  primary  deficit  poses  an  additional 
risk to the sustainability of public finances. 

27.2.  OVERALL ASSESSMENT 

The  United  Kingdom  appears  to  be  at  high  risk 
with  regard  to  the  long-term  sustainability  of 
public  finances.  Although  the  contribution  of  an 
ageing  population 
the  most 
problematic,  the  UK's  budgetary  position  poses 
severe risks to the sustainability of public finances. 

is  not  amongst 

Reducing  the  primary  deficit,  would  contribute  to 
reducing 
long-term 
to 
risks 
the  high 
sustainability of public finances.  

the 

Graph VII.27.1: Determinants of fiscal sustainability (United 

Kingdom) 

UK

S2(0...15)

S1(-1...12)

IBP(-2...9)

Assets 2007(15...113)

LTC(-1...13)

Debt 2060(-26...898)

Debt 2009(10...113)

Note on interpretation: See Graph VII.1.1 for Belgium. 
Data on assets: not available 
Source: Commission services. 

27. UNITED KINGDOM 

27.1.  OVERVIEW OF RESULTS 

in  age 

increases 

the  projected 

The sustainability analysis shows that on the basis 
of the current budgetary position of 2009, based on 
the  2009  commissions  services'  spring  forecast, 
and 
related 
expenditure, 
the  United  Kingdom  has  a 
sustainability gap (S2) of 12.4% of GDP, which is 
clearly  above  the  EU  average  (6.5%  of  GDP).  
This  means  that  to  put  public  finances  on  a 
sustainable  path,  the  United  Kingdom  should 
improve its structural primary balance in a durable 
manner  by  12.4%  of  GDP.  In  principle,  this 
adjustment could take place via both an increase in 
revenues  and  cuts  in  expenditure.  Alternatively, 
the  social  protection  system  would  have  to  be 
reformed  to  decelerate  the  projected  increase  in 
age-related expenditure. 

The  sustainability  gap  in  the  United  Kingdom  is 
mainly due to the initial budgetary position, i.e. the 
required  adjustment  to  stabilise  the  debt  ratio  is 
positive  (8.8%  of  GDP),  clearly  above  the  EU 
average  (3.3%  of  GDP).  In  parallel,  the  required 
adjustment  given  the  long-term  cost  of  ageing 
(3.6% of GDP) is above the EU average (3.2% of 
GDP). The increase in the long-term cost of ageing 
is  mainly  driven  by  pension  and  health-care 
expenditure  (increasing  by  2.5  p.p.  and  1.8  p.p.  
respectively in 2060 relative to 2010). 

In the 2006 Sustainability Report, the S2 gap was 
4.9%  of  GDP.  The  difference  between  that  report 
and  the  current  results  (7.5  p.p.)  stems  from  the 
deterioration  of  the  initial  budgetary  position  (7.0 
p.p.), while the component of the long-term cost of 
ageing  has  actually  decreased  (-0.5  p.p.).  The 
extension  of  the  projection  period  from  2050  (in 
the  2006 
the 
sustainability gap by 0.9 p.p. 

to  2060 

increases 

report) 

The UK's government debt in 2009, the base year 
of  the  analysis,  stood  at  68.4%  of  GDP  and  is 
forecast  to  increase  to  around  82%  of  GDP  in 
2010. The structural primary balance is forecast to 
decrease  slightly  from  -7.8%  in  2009  to  -9.2%  in 
2010.  Currently,  UK's  debt  is  slightly  below  the 
EU  average  but  above  the  60%  ceiling  set  by  the 

144 

 
 
 
 
 
Sustainability assessment per Member State, United Kingdom 

Chapter VII 

Table VII.27.1:  Summary table (United Kingdom) 

Underlying assumptions

2007

2010

2015

2020

2025

2030

2040

2050

2060

Change      

2007 - 2060

Population (millions)
Working age population (15-64) % of total
Old-age dependency ratio (65+/15-64)
Participation rate (15-64)

 - Older workers (55-64)

Unemployment rate (15-64)
Real potential GDP (growth rate)

Benefit ratio

Expenditure projections
Pensions

Health care
Long-term care
Education 
Unemployment benefits

Total age-related expenditure

Structural primary balance
Public debt

Cost of ageing

60.9
66.4
24.1
75.6
59.7
5.3
2.0

6.6
34.6
7.5
0.8
3.8
0.2

18.9

2008
-3.3
52.0

62.0
66.3
24.7
75.7
58.6
9.4
0.9

6.7
34.6
7.6
0.8
3.8
0.2

19.2

2009
-7.8
68.4

63.8
65.1
27.1
76.9
62.6
5.4
2.4

6.8
34.5
7.8
0.9
3.7
0.2

19.4

2010
-9.2
81.7

65.7
64.0
28.6
77.2
64.1
5.4
2.0

6.9
34.9
8.0
0.9
3.8
0.2

19.8

67.5
63.1
30.4
77.0
64.7
5.4
2.0

7.2
35.0
8.1
1.0
3.8
0.2

20.3

2020

159.8

2025

212.7

69.2
61.8
33.2
77.5
65.8
5.4
2.1

7.6
34.5
8.4
1.0
3.9
0.2

21.1

2030

271.3

72.0
60.8
36.9
78.5
70.3
5.4
2.1

8.0
34.2
8.9
1.1
3.8
0.2

22.1

2040

406.1

74.5
60.5
38.0
78.6
71.3
5.4
1.9

8.1
35.8
9.2
1.2
3.7
0.2

22.4

76.7
58.7
42.1
78.7
71.1
5.4
1.8

9.3
37.1
9.4
1.3
3.8
0.2

24.0

15.8
-7.7
18.0
3.1
11.4
0.1
-0.2

2.7
2.5
1.9
0.5
-0.1
0.0

5.1

2050

2060

559.9

759.2

Change in age-related expenditure 2010 - 2060 (% points)

Net age-
related 
expenditure

Pension 
taxation

Gross age-
related 
expenditure

Pensions

Health care

Long-term 
care

Unempl. and 
Education

Property 
income

Baseline scenario
Crisis scenario: lost decade

Sustainability Indicators

(End year 2060)

Baseline scenario
Crisis scenario: lost decade

Sensitivity to changes in assumptions

4.8
5.7

S1

10.8
11.7

S2

0.0
0.0

IBP

8.6
8.8

S1

4.8
5.7

DR

0.2
0.2

2.5
3.2

LTC

2.0
2.7

1.8
1.7

S2

12.4
13.3

0.5
0.5

IBP

8.8
8.9

0.0
0.2

S2

LTC

3.6
4.4

-0.3
-0.3

Cost of delay

RPB

0.7
0.8

4.5
5.2

Difference from the baseline scenario (% points)

AWG scenarios

Scenarios for health-care 

Baseline

Higher life 
expectancy

12.4

0.7

Pure Ageing

0.2

Higher 
labour 
productivity
0.0
Constant 
Health 
Status
-0.7

Older 
workers

Total 
Employment

Zero migration

Interest rate

-0.1

0.0

3.1

-0.1

Death-
related Costs

Income 
Elasticity

EU12 Cost 
Convergence

Labour 
Intensity

-0.4

0.5

:

0.6

Pure Ageing

Constant 
Disability

Improved 
Disability

Decrease in 
Informal 

Fast growth in 
unit costs

Slow growth in 
unit costs

Scenarios for long-term care

0.0

0.0

0.1

0.1

0.1

Comparison with SR 2006

S2 2006

S2 2009

Difference due to 

Tax burden

 (End year 2050)

4.9

11.4

IBP
7.0

LTC
-0.5

Source:  Commission services. 

-0.4

2008

38.5

Average 2000-
07
37.5

145 

 
 
 
 
 
Chapter A.I 
Deriving the sustainability indicators 

 
 
1.  DERIVING THE SUSTAINABILITY INDICATORS 

0. Notations  

t is the index for the year. 

0t

the last year before the long-term projection. 

tD  (adjusted) gross debt relative to GDP. 

tPB structural primary balance relative to GDP.  

change in structural primary balance compared to the base year 

tPB∆
GDP.  In  addition  change  in  structural  primary  balance  equals  a  sum  of  a  change  in  structural  primary 
income 
balance  due 
∆

in  age  related  expenditure  and  a  change 
PI

to  a  change 
(
ageing
∆+

in  property 

 relative to 

PB
0

PB
t

PB
t

∆=

∆+

PB

=

. 

)

t

t

PB
t

∆

PB

(

ageing

)

t

change  in  structural  primary  balance  due  to  development  in  age  related  expenditure 

compared  to  the  base  year    relative  to  GDP,  i.e. 

∆

PB

(

ageing

)

t

  does  not  reflect  development  in 

property  income flows over the projection horizon. 

tPI  property income relative to GDP. 

tPI∆

 change in property income compared to the base year  relative to GDP. 

r differential  between  the  nominal  interest  rate  and  the  nominal  GDP  growth  rate  i.e. 

R
+
G
+
where R and G are respectively the nominal interest rate (or discount rate) and the nominal growth rate. 

r
=+

1
1

1

1.  Deriving  the  S1  and  S2  indicator  under  the  assumption  of  constant  growth  rate/interest  rate 
differential(35) 

i. The inter-temporal budget constraint and the S2 indicator  

There is no agreed definition on what constitutes a sustainable position for the public finances. One can 
however impose that the debt (relative to GDP) remains bounded at any time in the future so that it does 
not  follow  an  explosive  path.  This  implies  (see  proof  in  appendix)  that  the  discounted  value  of  future 
structural primary balances should cover the current level of debt, i.e.:  

∞

D
t

0

− ∑

1(10
t
+=

t

PB
t
)
r
+

t

−

t

0

=

0

(1)  

This condition is referred to as the inter-temporal budget constraint or the solvency condition. Given 
an  initial  debt,  an  interest-growth  differential  assumption  and  a  future  path  of  the  structural  primary 

(35)  It is also supposed to be strictly positive. 

148 

 
 
 
  
 
 
 
 
                                                           
Deriving the sustainability indicators 

Chapter A.I 

balance, condition (1) may not be fulfilled. The S2 indicator is thus the change in the structural primary 
balance for every future year that ensures that condition (1) is true. In order to decompose the change in 
the primary balance to two parts corresponding to population ageing and the change in property income 
received by the general government r,  formula (2)  substitutes 

ageing

∆+

PB

for 

PI

∆

.  

)

(

tPB∆

t

t

S

2

=

rD
t

0

−

PB
t

0

−

r

1

44444

∞

PI
∆
∑
)
r
+
1
t
+=
0
144444

t
−
3

1(

−

t
t

0

r

∞

∆

PB
∑
1(
1
t
t
+=
0
4444 2
E

t

)

(
ageing
t
t
−
)
r
+
4444 3

0

t
2
D

(2)  

S2  is  a  sum  of  two  different  terms.  The  first  term  (D)  is  a  condition  concerning  the  initial  budgetary 
position  and  a  present  value  of  future  income  flows  from  property  income:  if  the  structural  primary 
balance (relative to GDP) remains unchanged in the future, the intertemporal budget constraint condition 
simply  says  that  the  structural  primary  balance  should  be  equal  to  "apparent  real"  interest  paid  on  the 
current level of debt adjusted by the present value of future property income flows. In that case, the level 
of debt would remain stable as a GDP. Indeed, debt relative to GDP increases by the difference between 
nominal interest rate and the nominal growth rate. If the structural primary balance compensates for this 
increase,  the  debt  relative  to  GDP  will  remain  stable.  (D)  is  the  distance  between  current  structural 
budgetary primary balance and the debt-stabilizing primary balance.  

The  second  term  (E)  is  a  condition  concerning  future  developments  in  the  property  income  adjusted 
structural  primary  balance:  the  bigger  the  decrease  of  the  structural  primary  balance,  the  higher  the 
immediate raise in the structural primary balance should be to fully compensate those changes. (E) is a 
synthetic  measure  of  the  time-varying  future  changes  in  the  property  income  adjusted  primary  balance 
expressed as a constant change in the primary balance as a share of GDP. 

ii. The S1 indicator 

The S1 indicator is the change in the structural primary balance for every future year that is required to 
reach a debt ratio in 2060 of 60% of GDP. The calculations below are valid for any date T in the future 
and for any level of debt 

TD . 

S

1

=

rD
t

0

−

PB
t

0

i

−

1
t
+=
0
T

1

44444

T

∑

∆
+

1(

i
i

−

t

0

+

PI
)
r
1
r

)

∑
t
−
+
1
t
+=
0
44444
3

1(

i

0

i
2
A

0

)

D
T
−

(
Dr
t
r

−
tT
−
1(
)
1
44 344 21
B

+

0

)

i

(3) 

T

∑

1
t
+=
0

∆

PB
1(

T

i

−

0

t

(
ageing
i
−
)
r
+
1
r

∑
i
t
−
1(
+
1
t
+=
0
444 2
444 3
C

)

i

0

1

As for S2, the S1 indicator is a sum of several terms. Contrary to S2, S1 also assumes that debt reaches a 
certain  level  of  debt;  the  first  term  only  ensures  that  debt  as  a  share  of  GDP  will  remain  at  its  starting 
level at a certain point in time. Additional effort measured by the second term (B) is therefore necessary 
to ensure that the debt will reach 60% of GDP in 2060. It tends to be large if the desired level of debt is 
small, the period of time given to reach this debt level is short or the initial debt is large. For countries 
with a lower initial level of debt, the term (B) is negative and reduces the sustainability gap. 

The last term (C) is a condition concerning future developments of the structural primary balance due to 
age related expenditure. It is slightly different from the term (E) in the S2 indicator because S1 only takes 
into account changes in the structural primary balance up to 2060, which in most cases, underestimates 
the cost of ageing. 

149 

 
  
 
 
 
 
 
 
European Commission 

Sustainability Report - 2009 

iii. Comparison of S1 and S2 

The  two  indicators  are  in  fact  very  close  and  the  S1  indicator  can  be  seen  as  a  finite  version  of  the 
intertemporal budget constraint. Indeed, if the debt requirement is set at a very distant date in the future, 
the two indicators S1 and S2 will be very close. 

Given that 

rDA
=
t

0

−

PB
t

0

=

D

    ;     

TB

0⎯⎯ →⎯ ⎯→⎯∞

    ;     

C

T

⎯→⎯∞
⎯⎯ →⎯

r

t

,(
DTS
1
T

)

T

⎯⎯ →⎯ ⎯→⎯∞

S

2

 (4) 

∞

∑

10
+=
t

∆
+

PB
t
−
t
r
)

t

0

1(

=

E

In  practice,  given  the  not  so  distant  requirement  (2060)  and  the  low  differential  between  interest  and 
growth rates, S1 and S2 are different.  

Table 1 sums up the calculations of S1 and S2.  

Table 1. comparison of S1 and S2 

Current  budgetary  position  and 
the  present  value  of 
future 
property income flows 

  Debt 

requirement 
2060 

in 

Long-term  changes  in  the  primary 
balance  due  to  change  in  age  related 
expenditure 

rDA
=
t

0

−

PB
t

0

−

i

i

T

∑

1
t
+=
0
T

∑

1
t
+=
0

∆
+

1(

1(

+

PI
)
r
1
r

)

  +

B

=

i
i

t
−

0

i

t
−

0

)

(
DDr
T
t
1
−
+

−
T

1(

r

)

0

+

C

−=

i

T

∑

t
+=
0

∆

PB
1(

1
T

∑

1(

i

1
t
+=
0

)

i

0

t

(
ageing
i
−
)
r
+
1
r

+

)

−

t

i

0

D

=

rD
t
0

−

PB
t
0

−

r

t

∞

∑

10
t
+=

∆
+

PI
)
r

t
t

1(

t
−

0

+ 0 

E

−=

r

t

+

∞

∑

10
t
+=

∆

PB
1(

(
ageing
t
−
)
r
+

t

0

)

t

S1
= 

S2
= 

=

C
α

1(
−+

α

)(

∆−

PB

(

ageing

)

(5) 

)

2060

Two different reasons may lead S1 to be greater than S2:    

-  The  debt  requirement  will  increase  S1  if  the  initial  level  of  debt  is  above  60%  and  decrease  S1 
otherwise:  nothing  similar  is  imposed  in  the  calculations  of  S2.  Therefore  high-debt  countries,  i.e. 
countries whose debt is above 60% in 2005 or at the end of the programme period, may have a higher S1 
than S2. For instance, the debt requirement will increase S1 by around ¾% point of GDP, for a country 
with an initial adjusted gross debt level of 100%(36).  

- The other difference between the two indicators comes from the horizon over which future changes in 
the primary balance are taken into account: over the period up to 2060 in the case of S1 and over infinite 
horizon in the case of S2. In EU countries, the overall budgetary impact of ageing is usually increasing 
over the next decades so that the maximum budgetary impact happens towards the end of the period. In 
that case, the change in the primary balance is higher in 2060 than it is on average over the period 2010-

(36)  If the difference between the interest rate and growth rate is 1.5%. 

150 

 
 
 
 
 
 
 
 
 
                                                           
Deriving the sustainability indicators 

Chapter A.I 

2060:  the  impact  of  changes  in  primary  balances  is  then  larger  in  S2  than  in  S1(37).  However,  some 
countries have enacted a large pension reform that is progressively implemented so that the increase in 
public  expenditure  reaches  its  maximum  in  the  middle  of  the  period  before being  significantly  reduced 
afterwards. Those countries may exhibit a higher S1 than S2.  

To sum up, S2 should be in most cases greater than S1 except for countries where the initial level of 
debt is substantially higher than 60% and/or the increase in expenditure due to ageing is lower in 
2060 than on average over the period up to 2060.  

iv. The required primary balance 

Instead of presenting public finance imbalances as a gap towards a sustainable situation, it is also possible 
to present the resulting target in terms of primary balance (the required primary balance) that would result 
from  a  budgetary  consolidation  in  the  medium-term  that  ensures  sustainability.  The  required  primary 
balance  can  be  calculated  for  both  indicators  (though  the  Commission  regularly  calculates  the  required 
primary balance for the S2 indicator). 

RPB
t

0

=

PB
t

0

+

S

2

=

rD
t

0

−

r

t

∞

∑

1
t
+=
0

PB
∆
t
t
−
r
)
+

1(

t

0

 (6) 

Formula (6) shows that the RPB is a more stable indicator than the sustainability indicator. Indeed, it only 
depends on the current level of debt, the projected budgetary change over the long-term and the interest 
rate/growth  rate  differential.  These  data  typically  change  infrequently,  e.g.    if  a  pension  reform  is 
implemented  or  if  the  future  outlook  on  demography,  potential  growth  or  interest  rate  are  changed.  By 
contrast, sustainability gap are also sensitive to changes in the current structural primary balance, which 
are more common. 

2. Deriving the S1 and S2 indicator under the assumption of time-varying growth rat/interest rate 
differential 

The interest-growth rate differential has so far been assumed constant. This is not the case in the current 
EU  framework  to  assess  public  finance  sustainability.  The  real  interest  rate  is  constant  for  all  EU25 
countries and equal to 3% while GDP growth projections are country-specific.  

Lets introduce 

α
;
ji

=

1(

+

r
i

1)(

+

r
i

1
+

1)...(

+

r

j

)

  if 

i ≤ and 1 otherwise. 

j

The dynamics of debt is: 

DD
=
t

t

α
t

0

0

+ −
;1
t

i

t

∑

PB
α
i
i
1
t
+=
0

; 

+

;1

t

The inter-temporal budgetary constraint is: 

D
t

0

=

i

∞

∑

t
+=
0

PB
i

α
t

0

1

+

,1

i

(37)  Formally (E) can be written as a weighted average of (C) and the change in primary balance in 2060 (see annex). 

151 

 
 
                                                           
European Commission 

Sustainability Report - 2009 

The S2 indicator is: 

S

2

=

i

D
t

0

1

α
t

0

1

+

,1

i

−

PB
t

0

−

i

i

∞

∑

t
+=
0

∞

∑

t
+=
0
∞

∑

t
+=
0

PB
i

∆
α
t

1

0

+
1

,1

i

(2bis) 

α
t

0

1

+

,1

i

In the case where the interest rate/growth rate differential and the structural primary balance are constant 
after a certain date (here 2060): 

S

2

=

2050

1

D
t

0

2050

∑

PI

∆
α
t

i

+

PI

∞

∆
r
α
t
∞

i

−

1
t
+=
0
2050

,1

i

0

+
1

,1

2050

−

PB
t

0

0

+
1

1
α
t

0

0

i

+

+

,1

,1

+

+

2050

α
t

α
t

∑
∑
r
r
α
1
1
t
i
t
i
+=
+=
2050
t
∞
0
0
44444444444
44444444444
3
2
1
D
(
PB
ageing
r
α
t
∞
1

(
α
t
2050

ageing

,1
i
1

∑

PB

1
t
+=
0

2050

2050

2050

∆

∆

+

)

)

,1

,1

∞

,1

+

+

+

+

i

i

i

0

0

0

0

−

∑
1
t
+=
,1
i
0
4444444
2
E

α
t

+

+

i

0

1

r
α
2050
t
∞
4444444
3

,1

+

0

S1 is such that 

D
T

=

D
t

α
t

0

0

+

;1

T

T

∑

(
1
t
+=
0

−

i

PB
i

+

S

)
α
i

1

+

;1

T

D
t

S
1

=

α
t

0

0

−

D
T

;1
+

T

T

∑

α
;1
i
+
1
t
+=
0

i

T

−

PB
t

0

i

−

T

∑

∆
1
t
+=
0

PI
α
;1
i
i
+

T

T

∑

α
;1
i
+
1
t
+=
0

i

T

i

−

T

∑

∆
1
t
+=
0

(
)
ageing
PB

T

∑

α
;1
i
+
1
t
+=
0

i

T

α
;1
i
+

T

i

=

D
t

0

(
α
t

0

;1
+

T

−

)1

T

T

∑

∆
1
t
+=
0

PI
α
;1
i
i
+

T

i

−

T

−

PB
t

0

+

D
t

0
T

−

D
T

i

−

∑
α
;1
i
+
1
t
i
+=
0
4444444

T

1

∑
α
;1
i
+
1
t
+=
0
1434214444444
3

α
;1
i
+
1
t
+=
0

∑

T

T

i

i
2
A

B

T

∑

∆
1
t
+=
0

(
)
ageing
PB

T

∑
α
;1
i
+
1
t
+=
0
4444
2
C

i

T

4444

3

(2ter) 

(3bis) 

α
;1
i
+

T

i

Box 1. Proofs 

Equation 1 

Let’s suppose the debt (relative to GDP) remains bounded at any time in the future.  

It means that  M∃

such as 

D
t

=

D
t

0

1(

+

r

)

t

−

t

0

−

i

152 

t

∑

10
t
+=

PB
i

1(

+

r

)

t

−

i

<

M

 
   
 
 
 
 
Deriving the sustainability indicators 

Chapter A.I 

1(

+

r

)

−

i

=

PB
i
1

D
t
)
r
+

1(

t

−

t

0

<

M
)
r
+

1(

t

−

t

0

t

∞
⎯→⎯
⎯⎯ →⎯

0

 because r is strictly positive. 

So 

D
t

0

+

i

t

∑

t
+=
0

D
t

0

∞

− ∑

PB
i
1
t
+=
0

i

1(

+

r

)

(
i
−−

t

)

0

=

0

(1) 

Equation 2 

The S2 indicator is the change in the structural primary balance compared with the base year for every 
future year that ensures that condition (1) is fulfilled.  

Mathematically, it can be written:

D
t

0

=

t

∞

∑

t
+=
0

PB
t
1(
+

+
)
r

S
2
t
−

0

t

1

 (1).  

Since the discount rate is strictly positive,

t

∞

+∑
1(

10
t
+=

1
r

)

t

−

t

0

=

1
r

. 

D
t

0

=

S
2
r

+

t

∞

∑

1
t
+=
0

PB
t
)
r
+

1(

=

t

−

t

0

S
2
r

+

PB
t
r

0

+

t

∞

∑

1
t
+=
0

PB
∆
t
t
−
)
r
+

1(

t

0

∞

∑

t
+=
0

∆
+

PB
t
t
−
)
r

t

0

1(

1

(2). 

S

2

=

rD
t

0

−

PB
t

0

−

r

t

Equation 3 

The calculations are made for any date T in the future and for any target level of debt in the future. The 
dynamics of the debt can be written: 

DD
=
t

t

0

1(

+

r

)

t

−

t

0

−

i

t

∑

PB
t
1
t
+=
0

1(

+

r

)

t

−

i

−

0

i

1S is such that 

t DD =
T

t

∑

t
+=
0

1(

+

r

)

t

−

i

PB
i

∆
1

tT
−

0

+

r

)

−

D
T

1(
T

D
t

0

S
1

=

i

∑

t
+=
0

iT
−

+

r

)

1(
1

−

PB
t

0

i

−

PB
i

1(

+

r

)

iT
−

T

∑

t
+=
0

∆
1
T

∑

i

t
+=
0

iT
−

+

r

)

1(
1

Given 

i

T

∑

1(
1
t
+=
0

+

r

)

T

1
−

iT

− ∑
=

i

=

t

0

1(

+

i

r

)

=

1(

+

r

0

−

1

tT
−

)
r

153 

 
  
 
 
  
 
  
 
 
 
European Commission 

Sustainability Report - 2009 

S
1

=

rD
t

0

1(

+

r

)

tT
−

0

−

rD
t
tT
−

0

+

rD
t

0

0

−

rD
T

−

1

−

PB
t

0

i

−

1(

+

r

)

PB
i

1(

+

r

)

iT
−

T

∑

∆
1
t
+=
0
T

iT
−

+

r

)

∑

1(
1
t
+=
0

i

)

(
Dr
t
r

+

1(

−
tT
−
)

D
T
−

0

0

1

i

−

PB
i

1(

+

r

)

iT
−

T

∑

∆
1
t
+=
0
T

iT
−

+

r

)

∑

1(
1
t
+=
0

i

(
Dr
t
r

+

1(

0

)

−
tT
−

)

D
T
−

0

1

T

∑

t
+=
0
T

∑

t
+=
0

1(

1

1(

1

−

i

i

∆
+

+

PB
i
i
−
)
r
1
r

)

−

i

t

0

t

0

(3) 

S
1

=

rD
t

0

−

PB
t

0

+

S
1

=

rD
t

0

−

PB
t

0

+

Equation 5 

E

−=

r

t

∞

∑

1
t
+=
0

PB
∆
t
t
−
)
r
+

1(

t

0

−=

t

t

∞

∑

1
t
+=
0
∞

∑

1
t
+=
0

PB
∆
t
t
−
)
r
+
1
r

+

)

−

t

T

∑

1
t
+=
0

t

−=

t

0

t

0

1(

PB
∆
t
t
−
)
r
+
∞

∑

t

1
t
+=
0

∞

∑

1
Tt
+=
1
r

)

−

t

+

t

0

1(

+

PB
∆
t
t
−
)
r
+

1(

t

0

t

0

1(

1(

T

∑

1
t
+=
0

C

i

E

=

1
r

i

−

t

0

)

1(

+

∆−

PB
T

∞

∑

1
Tt
+=

∞

∑

t

1
t
+=
0

1
r

)

t

−

t

0

1(

+

1
r

)

t

−

t

0

1(

+

=

C
α

1(
−+

α

)(

∆−

PB
T

)

3. Deriving the cost of a delay indicator 

It provides an estimate of the cost of delay in making a complete adjustment according to the old S1 and 
the S2 indicators. It further assumed a constant interest rate-growth rate differential. The cost of a delay 
with non-constant interest rate for the currently used indicators, S1 and S2, are given here.  

S1 indicator: 

The expression for the cost of delay using the S1 indicator is: 

'
S
1

=

S
1

t

1

α
t

0

1

+

;1
t
1

=

S
1

1(

+

t

2050

∑

t
+=
0
2050

∑

1

α
t

0

1

+

;1
t
1

)

delay

∑

t
+=
0
50

∑

t

++=
0

1

t

delay

α
t

0

+

;1

t

t

++=
0

1

t

delay

α
t

0

+

;1

t

S2 indicator: 

If the adjustment is made today, 

D
t

0

=

t

154 

∞

∑

t
+=
0

PB
t
α
t

0

1

+

S

2

+

;1

t

 
 
 
   
 
 
 
 
 
Deriving the sustainability indicators 

Chapter A.I 

'
2

S
α
t

0

+

;1

t

If the adjustment is postponed in 5 years then, 

D
t

0

=

t

Relationships between the two indicators: 

∞

∑

t
+=
0

PB
t

α
t

0

1

+

;1

t

+

t

∞

∑

++=
0

1

t

delay

S

'
2

=

S

2

t

1

α
t

0

1

+

;1
t
1

t

=

S

2

∞

∑

t
+=
0
∞

∑

1

α
t

0

1

+

+

;1
t
1

50

∑

t
+=
0
50

∑

1
r
α
∞

50,1
1
r
α
∞

50,1

+

t

++=
0

1

t

delay

α
t

0

+

;1

t

t

++=
0

1

t

delay

α
t

0

+

;1

t

The cost of the delay is proportional to the initial tax gap indicator. If r is constant, the former formula is 

significantly reduced:

S

'
2

=

S

1(2

+

r

)

delay

4.  Deriving  the  equivalence  between  sustainability  indicators  –  a  'flow'  measure  -  and  implicit 
liabilities/debt – a 'stock' measure 

Section II.3.2 showed that the sustainability indicators can also be expressed as the stock of net implicit 
liabilities, or, net implicit debt under certain assumptions. In particular, if for both the sustainability gap 
measure and the net implicit debt measure it is assumed that they: (i) have the same starting point, i.e. the 
structural  primary  balance  of  general  government;  (ii)  have  the  same  discount  rate;  (iii)  they  have  the 
same  coverage  of  future  government  commitments  (i.e.  age-related  expenditures  evolving  in  line  with 
demographic developments); and, (iv) they take into account that government's ability to receive the same 
revenues as a share of GDP as today, the S2 sustainability indicator less the current level of debt can be 
expressed as the current stock of net implicit debt. Specifically, one can define the net implicit liabilities 
ID , as the discounted future structural primary balances, or equivalently the 
of the general government, 

0t

∞

ID = ∑

0t

t

10
t
+=

−
1(
+

PB
t
t
−
)
r

t

0

  i.e.  the  net  present  value  of  non-

net  present  value  of  future  primary  deficits: 

financed future public spending. 

In this case, the S2 can be rewritten as  

S

2

=

rD
t

0

−

r

t

∞

∑

1
t
+=
0

PB
t
)
r
+

1(

t

−

t

0

=

(
Dr
t

0

+

ID
t

0

)

One can express the level of implicit debt as a function of S2 and current level of debt, showing that those 
two measures are indeed equivalent. 

ID
t

0

=

S
2
r

−

D
t

0

This definition of net implicit debt covers all future imbalances linked to age-related social spending on 
pensions,  health-care,  long-term  care,  education  and  unemployment.  It  is  however  not  limited  to  those 
five expenditure items. The starting point is defined for the total general government sector, which also 
includes other items. If the current structural primary balance is lower than the debt-stabilizing structural 
primary  balance,  it  is  also  included  in  this  definition  of  the  implicit  debt.  By  contrast,  if  the  current 
structural  primary  balance  is  larger  than  the  debt-stabilizing  primary  balance,  it  means  that  the  general 
government is in the process of accumulating assets and/or reducing debt. 

155 

 
 
 
 
 
 
European Commission 

Sustainability Report - 2009 

In the calculation of S2 sustainability gap, explicit debt and net implicit debt are given equal importance. 
It should be borne in mind that the value of net implicit debt depends on the long-term projections and 
strongly on the discount rate. It is therefore not as "observable" as the current level of debt is. 

It  should  be  noted  that  implicit  debt  is  even  more  sensitive  to  the  interest  rate  than  the  sustainability 
indicator.  Indeed,  sustainability  indicators  are  bounded,  because  the  impact  ageing  reaches  a  maximum 
(at the latest in 2060, after which the primary deficit is kept constant). The intuition behind the result is 
straightforward.  If  a  country  is  expected  to  experience  a  maximum  increase  of  5%  of  GDP  of  public 
spending, current adjustment to cover this increase is necessary less than 5%, as the interest rate/growth 
rate differential is positive. In general, the lower the interest rate, the higher the overall increase will be. 
By contrast, implicit debt is not bounded. In the extreme where the interest rate is very close to the growth 
rate (or equivalently r is close to zero), the implicit debt can be very large. Changing the assumptions for 
the interest rate can therefore give rise to a larger variation in the 'stock' measure (implicit debt) measure 
compared with the 'flow' measure (sustainability indicators). 

156 

 
Chapter A.II 
Revenue projections 

 
 
1. 

REVENUE PROJECTIONS 

1.1.1.  Taxation of pensions 

In  assessing 
the  sustainability  gap(s),  most 
government revenues are assumed to stay constant 
as  a  share  of  GDP.  Two  components  of  revenues 
are  explicitly  modelled  however.  These  are 
property  income  and  direct  tax  revenues  from 
pensions in Member States where this is possible. 

An  ageing  population  is  likely  to  affect  the  tax 
revenues  received  by  government  as  pension 
income is not distributed and therefore taxed in the 
same  way  as  other  income  and  as  it  may  not  be 
taxed in the same way either. Across the Member 
States  there  is  a  range  of  tax  arrangements  for 
pensions,  and  a  number  of  countries  are  in  a 
transition  period  where  the  tax  treatment  of 
pension funds in changing.  

For public schemes, an ageing population can have 
an  ambivalent  effect  on  the  receipts  from  tax 
revenues.  On  the  one  hand,  the  government 
receives  tax  from  pensions  drawn.  On  the  other 
hand,  pensions  received  are  usually  lower  than 
wages  (leading  to  a  benefit  ratio  of  less  then  1), 
meaning  that  pensions  will  be  taxed  at  lower 
marginal  –  and  average  –  rates  of 
in 
progressive  systems.  The  change  in  both  these 
components is considered.  

tax 

their 

timing.  Over 

their  working 

For countries with a significant private system, tax 
revenues  are  affected  both  in  terms  of  their  size 
life, 
and 
individuals  first  become  net  contributors  to  a 
private pension system while they later become net 
receivers  of  pension  income.  In  terms  of  the  tax 
incidence of the part of their income that is saved 
in  the  form  of  the  pension,  a  typical  EET 
system (38)  effectively  leads  to  a  deferral  of  the 
payment  of  tax  from  the  time  when  individuals 
earn  their  income  to  the  time  when  the  consumed 
it.  In  addition,  the  overall  tax  paid  in  an  EET 
system  may  be  lower  as  pension  contributions 
grow  (which  may  occur  as  individuals  anticipate 
having  to  save  more  to  ensure  that  their  now 
longer retirement years are adequately funded), as 

(38)  An  EET  system  is  one  where  contributions  to  the  pension 
fund  out  of  wages  are  exempt  from  income  tax,  capital 
gains by the fund are exempt from tax, but pensions drawn 
are  taxed  as  income.  Such  a  system  operates  in  many  EU 
countries for example in Germany (Riester plan). 

158 

the marginal tax they are exempt from in the years 
they  contribute  is  higher  than  rate  they  pay  when 
they  draw  their  pensions.  Moreover,  there  may 
also be an overall fall in revenue if private pension 
saving crowds out other saving, which is normally 
undertaken out of taxed income. 

simple  model 

Given the differences between the pension and tax 
systems  in  the  Member  States,  the  data  available 
and  the  countervailing  effects  of  ageing  on  the 
pension  system,  the  projections  in  this  report 
model  the  evolution  of  the  tax  received  from 
pensions  using  a 
that  can 
accommodate a range of differences. The model is 
based  on  the  average  personal  income  tax  rate  on 
pensions observed in recent years, the elasticity of 
income  tax  and  the  evolution  of  the  average 
(public  and  private)  pensions  taken  from  the 
Ageing Report. The average tax rate is modelled to 
evolve  according  to:                                     
⎞
⎟⎟
⎠

⎞
−⎟⎟
⎠

P
0
W
0

P
t
W
t

log

log

⎛
⎜⎜
⎝

log

⎛
⎜⎜
⎝

T
t
P
t

⎞
=⎟⎟
⎠

log

⎛
⎜⎜
⎝

T
0
P
0

⎞
+⎟⎟
(1(
⎠

ε

−

)1

)

⎛
⎜⎜
⎝
⎞
⎟⎟
⎠

log

⎛
⎜⎜
⎝

P
0
W
0

where  T  is  the  average  income  tax  paid  by 
pensioners,  P  the  average  pension,  W  the  average 
wage  in  the  economy  and  ε  the  elasticity  of 
personal income tax.   

The  average  income  tax  paid  by  pensioners  is  set 
to zero for countries where pensions are not (or are 
only  minimally)  taxed.  The  average  pension  used 
may  be  public,  private  or  both,  depending  on  the 
system  in  place  in  a  given  Member  State  and  on 
the  data  available.  Data  on  private  pension 
projections  and  on  their  tax  treatment  are  not 
available  in  all  countries  that  have  a  significant 
private component to their pension system.  

For  countries  where  a  significant  change  in  the 
pension  or  tax  system  is  envisaged,  there  is  no 
explicit  modelling  of  tax  revenues  from  pensions. 
This is the case, for example, for Hungary where a 
new pension formula and a new system of pension 
taxation will be introduced in 2013.  

The  model  generates  constant  revenues  from 
pensions  if  there  is  no  expected  change  in  the 
benefit  ratio.  This  is  also  the  case  for  countries 

 
                                                           
Chapter A.II 

Revenue projections 

adjustment, meaning that government debt is only 
driven  by  the  general  government  balance  and 
there is no net sale or purchase of financial assets 
in  the  future.  Rather  than  staying  constant  as  a 
share of GDP, the default position is therefore for 
these  assets  stay  constant  in  nominal  terms  rather 
than  as  a  share  of  GDP.  The  implication  is  that 
where  the  government  receives  property  income, 
this  income  is  used  to  reimburse  debt  through  its 
contribution  to  the  general  government  balance, 
rather  than  to  purchase  other  assets.  When  short-
term  assets  (such  as  bonds)  mature,  they  are 
therefore  implicitly  assumed  to  be  replaced  with 
other bonds of the same nominal value. 

the  no 

The  stock  of  assets  which  generate  income  for 
Member States' governments is not always known. 
By  making 
stock-flow  adjustment 
assumption,  the  evolution  of  property  income  can 
be modelled just using assumptions about the rate 
of return on assets in the future relative to now. In 
modelling  the rate  of return, a  distinction  is  made 
between  income  received  from  bonds,  equity  and 
rents.  

the 

remaining 

For bonds, the rate of return of 5% is applied from 
2012 on; before, the yield of a 10-year government 
bond  is  used.  As  data  on  the  return  from  equities 
are only available on distributed returns, so that the 
value  reported  in  national  accounts  in  the  starting 
year may only be a fraction of the overall return on 
equity; 
fraction  would  be 
representing  a  valuation  effect.  As  a  simplifying 
assumption, the dividend-to-GDP ratio is assumed 
to  be  constant  over 
thereby  assuming 
continuing  valuation  effects.  For  rent  from  land 
and  subsoil  assets,  it  is  assumed  that  the  ratio  of 
rents-to-GDP  will  remain  constant  over  time, 
except 
the 
Netherlands,  where  the  (substantial)  stock  of 
subsoil assets is assumed to be exhausted by 2050 
and the level of rent to GDP is modelled to return 
into line with the average of other Member States. 

the  cases  of  Denmark  and 

time, 

in 

Given  these  assumptions,  the  projected  path  of 
property  income  over  time  only  depends  on  the 
stock  of  bonds  held  at  the  start  of  the  projection 
period  given  the  level  of  income  received  from 
property. The higher are bond holdings, the steeper 
the decline in property income over time. 

with  flat  tax  system  (ε=1) (39).  The  model  only 
forecasts  significant  changes  in  revenues  from 
pension  taxation  for  Member  States  where  the 

benefit 

ratio 

P
W

⎛
⎜
⎝

⎞
⎟
⎠

is 

expected 

to 

change 

significantly and the personal income tax system is 
reasonably progressive (ε is greater than 1). 

The  analysis  is  not  undertaken  for  Germany, 
Estonia,  Greece,  Cyprus,  Slovenia  and  the  United 
Kingdom,  and  only 
the  public  pensions  are 
modelled  in  Belgium,  the  Czech  Republic  and 
Romania. For most remaining countries, the effects 
are  small  (within  0.7%  of  GDP),  with 
the 
exception  of  Denmark,  Luxembourg  and  the 
Netherlands which are expecting to see an increase 
in  tax  revenues  of  1.2,  1.9  and  2.7%  of  GDP 
respectively,  between  2010  and  2060.  Austria  is 
the  only  country  for  which  a  decrease  in  tax 
revenues is anticipated.  

1.1.2.  Property income  

Property  income  is  the  income  received  by  the 
owner of an asset (whether financial or physical) in 
return  for  providing  funds  for  other  agents. 
Governments will typically both make and receive 
such payments. They pay interest on their debt and 
receive  rent  for  the  assets  they  own.  Government 
receipts  from  other  sources are, broadly  speaking, 
a function of the tax bases and the rates chosen by 
the  government.  Property  income  differs  in  that  it 
is determined by the market rather than policy. For 
this  reason,  in  assessing  the  sustainability  gaps, 
property  income  received  by  governments  is 
explicitly  modelled  in  a  way  that  is  different  to 
other receipts, albeit using simplified assumptions. 

interest 

received 

Property income received by the Member States is 
mainly  composed  of 
from 
deposits, bonds and loans; dividends received from 
shares and withdrawals from the income of quasi-
corporations; and rents on land and subsoil assets. 
Projecting these forward in a detailed way requires 
forecasting  the  return  on  these  assets,  their  future 
value and the purchases and sales of these assets. 

In  order  to  model  the  progression  of  property 
income,  it  is  assumed  that  there  is  no  stock-flow 

(39)  For  example  Estonia  has  an  estimated  elasticity  of  1.1 

owing to the flat income tax system. 

Table  A.2.1  shows  the  evolution  of  property 
income used in the estimation of the sustainability 

159 

 
                                                           
European Commission 

Sustainability Report - 2009 

Table A.II.1.1:  Property income (% of GDP) 

2007
0.62
1.49
0.83
1.74
0.74
1.53
1.06
0.92
1.02
0.78
0.61
0.72
0.70
0.57
1.64
0.91
1.35
2.58
1.47
1.31
0.73
0.95
0.72
1.52
4.43
2.50
0.72

2010
0.59
1.42
0.74
1.61
0.71
1.43
1.02
0.87
0.95
0.75
0.59
0.62
0.64
0.51
1.46
0.88
1.33
2.44
1.38
1.19
0.70
0.91
0.68
1.40
4.15
2.36
0.67

2020
0.55
1.32
0.63
1.39
0.66
1.24
0.97
0.79
0.83
0.71
0.54
0.42
0.56
0.42
1.13
0.77
1.28
2.13
1.22
0.98
0.64
0.81
0.62
1.22
3.76
2.16
0.55

2030
0.51
1.25
0.55
1.10
0.60
1.17
0.93
0.73
0.73
0.66
0.50
0.28
0.52
0.37
0.95
0.74
1.25
1.79
1.05
0.89
0.57
0.79
0.58
1.13
3.34
1.92
0.48

2040
0.48
1.21
0.50
0.89
0.56
1.14
0.90
0.70
0.67
0.62
0.47
0.21
0.50
0.34
0.83
0.72
1.23
1.48
0.93
0.84
0.52
0.77
0.56
1.09
3.04
1.76
0.43

2050
0.45
1.19
0.46
0.71
0.52
1.12
0.89
0.67
0.64
0.60
0.45
0.16
0.49
0.32
0.75
0.71
1.21
1.21
0.84
0.81
0.49
0.77
0.54
1.06
2.83
1.65
0.40

2060
0.44
1.17
0.44
0.64
0.50
1.10
0.88
0.65
0.61
0.58
0.44
0.14
0.48
0.31
0.69
0.70
1.20
1.16
0.78
0.79
0.47
0.76
0.53
1.04
2.68
1.57
0.37

change
2010-60
-0.15
-0.25
-0.30
-0.97
-0.21
-0.33
-0.15
-0.22
-0.35
-0.18
-0.15
-0.48
-0.17
-0.19
-0.76
-0.18
-0.13
-1.29
-0.59
-0.40
-0.23
-0.15
-0.15
-0.36
-1.46
-0.79
-0.29

BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SI
SK
FI
SE
UK

Source: Commission service 

falls  being 

gaps. It shows that this income is expected to fall 
over  time  for  all  Member  States,  with  the  most 
significant 
the 
Netherlands and Finland. In the Finish case, this is 
driven  by  the  high  level  of  bond  holdings  by  the 
government,  which  contribute  about  half  of  the 
country's significant receipts from property. 

for  Denmark, 

160