Setting targets for government budgets under the EU Stability and Growth Pact and ageing populations

Abstract

Originally, in 1997, balanced budget or surplus was set as medium-term objective (MTO) for government budgets under the European Union Stability and Growth Pact, while in 2005 the MTOs were made country-specific. They were agreed for a transitional period only, until the criteria for taking into account implicit pension liabilities are established. Work on this is still unfinished (May 2009). The paper specifically addresses the question of setting MTOs under alternative rules for the public pension system, based on 'actuarial neutrality across generations' as a benchmark for intergenerational equity. The repercussions of the current crisis are discussed at the end.