Author(s): European Commission (DG ECFIN)
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.