Abstract
The social and economic developments in European countries have put pressure on their national budgets and threaten the sustainability of public policies. The traditional fiscal indicators, specifically, the deficit and the debt, which are still used today as guiding tools, have proved to be insufficient, due to their arbitrary nature and short-term focus. In this paper, we resort to an alternative fiscal indicator, known as ‘generational accounting’, which is able to incorporate the future changes in the demographic structure of the population, and their corresponding impact on public accounts. It is also able to evaluate how current fiscal policy affects, not only, current generations, but also future generations. We apply this methodology to assess the long-term fiscal situation of Portugal, and compare the results with those obtained in 1999. In this context, we also explore additional scenarios, as well as additional indicators, in order to provide some robustness to our findings. Our results show that, if the current fiscal policy is not significantly changed, future generations will face a much heavier fiscal burden than current generations.
Highlights
In recent years, the stability of public finances in European countries has been under pressure
Developed economies are being afflicted by slowing economic growth and population ageing
It reflects a “zero-sum” characteristic, in which the debt, current and future public expenditures will have to be covered through net tax payments of the current or future generations
Summary
The stability of public finances in European countries has been under pressure. If we look at society as being composed by three major age groups according to the life cycle (childhood/youth, middle-aged/active, and elderly/retirement), both the elderly and youth groups would be net beneficiaries (benefits received are higher than taxes paid) of public budgets, while the middle-aged groups would, , be net contributors of public budgets, and have to contribute enough to off-set the spending with the other 2 groups of net beneficiaries. Based on these arguments, it follows that the structure of the population decisively affects the balance of public budgets
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