Finanspolitisk holdbarhed

Average growth in Danish healthcare expenditures relative to GDP has been among the lowest in the OECD area since 1970, but growth rates are rapidly increasing. This analysis separates the expenditure growth according to demographic and and non-demographic factors. As an innovation the effects of so-called healthy ageing are included into the demographic effects. Annual demographic and non-demographic real growth in publicly financed health expenditures is estimated to be 0.4 pct. and 2.0 pct. respectively for the period 1993-2008. Average non-demographic growth in healthcare expenditures exceeds average annual growth rate in real productivity per working hour by 0.9 pct. in the period. Fiscal sustainability is shown to be very sensitive to non-demgraphic cost increases in excess of productivity growth: A sustained non-demographic expenditure growth of 0.3 pct. in excess of the productivity growth increases the fiscal sustainability problem by 2.1 pct. of GDP. Therefore current growth in non-demographic healthcare expenditures cannot be maintained for a longer period without challenging the public financing of healthcare expenditures in Denmark. On the other hand fiscal sustainability is shown to be robust with respect to growth in healthcare expenditures due to future increases in life expectancy. This is a consequence of healthy ageing and the indexation of the statutory retirement age to life expectancy.

Regeringens forslag til tilbagetrækningsreform er et betydeligt skridt i retning af en langsigtet løsning på finansieringen af fremtidens velfærd. Det skyldes ikke mindst, at forslaget indfører et princip om at regulere pensionsalderen med levetiden. På trods af de positive takter er der risiko for, at ændringen i tilbagetrækningsalderen er for lille, kommer for sent og vil blive udsat yderligere af fremtidige politikere.

Health care expenditure has increased faster than income in most OECD countries during the last 30 to 40 years. Expectations are that demographics will further increases in expenditure growth in the coming years. However, wealth, technological progress, and increasing relative prices (partly due to Baumol effects) are likely to remain the main driving forces of health care expenditures in the future. It may be compatible with individual optimality that growth in health care expenditure remains higher than general economic growth. If this is the case, health care expenditure may become the major challenge to the universal welfare state.

Economic theory points out that immigration of even low-skilled immigrants may improve public finances in Western welfare states, and it is some times suggested that fiscal sustainability problems in Western countries caused by ageing populations could be solved by increasing immigration. We examine consequences of various immigration scenarios using the large-scale computable general equilibrium model DREAM describing the Danish economy. It turns out that increased immigration will generally worsen the Danish fiscal sustainability problem. Improved economic integration of immigrants and their descendants, however, may alleviate the problems of the public sector considerably.

Indvandrere og efterkommeres gennemsnitlige økonomiske adfærd afviger fra jævnaldrene personer af samme køn fra den Resterende befolkning. De har en lavere erhvervsfrekvens, et større træk på offent-lige indkomstoverførsler, herunder højere ledighed og en lavere gennemsnitlig løn for de beskæftigede. Antages hypotetisk, at indvandrere og efterkommere har en gennemsnitlig økonomisk adfærd svarende til Resterende befolknings, betyder det en stigning i produktionen på 6 procent. Samtidig forbedres den finanspolitiske holdbarhed væsentligt. Der er således et stort potentiale for forbedret integration. En for-øgelse af indvandringen med 5000 personer om året, der har samme adfærd som nuværende indvan-drere, vil forøge befolkningen betydeligt på længere sigt, men kun have en begrænset negativ effekt på produktion og forbrug pr. capita. Den finanspolitiske holdbarhed forværres kun lidt, hvis den forøgede indvandring består af personer fra både mere og mindre udviklede lande. Hvis merindvandringen kun kommer fra mindre udviklede lande er forværringen af den finanspolitiske holdbarhed noget større.

Based in generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy in Denmark. A strategy of tax smoothing is found to provide a fairly even intergenerational distribution of the financial burden associated with population ageing. While tax smoothing causes a relatively sharp increase in public debt along the transition path, a strategy of debt smoothing is shown to pass a larger part of the financial burden onto current generations but without changing the intergenerational distribution profile in any dramatic way. A comparison based on a social welfare function indicates a marginal superiotity of tax smoothing.

Average growth in healthcare expenditures relative to GDP in Denmark has been among the lowest in the OECD area since 1970, but growth rates are rapidly increasing. This paper separates the expenditure growth into demographic and nondemographic factors. As an innovation compared to previous analyses we include the effects of so-called healthy ageing into the demographic effects. Annual demographic and non-demographic real growth in publicly financed health expenditures is estimated to be 0.4 pct and 2.0 pct. respectively for the period 1993-2008. For the period 1999-2008 figures are 0.2 pct. and 2.8 pct. The average annual real non-demographic expenditure growth rate exceeds the growth rate in real productivity per working hour by 1.5-2.3 pct. in the period 1999-2008. The effects of growth in healthcare expenditures on fiscal sustainability are assessed and the results are: Fiscal sustainability is robust with respect to growth in health care expenditures due to future increases in life expectancy. This is a consequence of healthy ageing and the indexation of the statutory retirement age to life expectancy that follows from the 2006-welfare reform. Fiscal sustainability remains very sensitive to non-demgraphic factors: An increase in non-demographic expenditure growth of 0.3 pct. in excess of the productivity growth increases the fiscal sustainability problem by 2.1 pct. of GDP. Doubling the expenditure growth relative to productivity growth to 0.6 pct. increases the fiscal sustainability problem by 4.8 pct. of GDP. Therefore current growth in non-demographic healthcare expenditures cannot be maintained for a longer period without challenging the public financing of healthcare expenditures in Denmark. Based on generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy. A strategy of tax smoothing is found to successfully distribute the financial burden associated with population ageing across generations, but this happens at the cost of a sharp increase in public debt along the transition path. This can be avoided if a strategy of debt smoothing is followed, but this shifts the financial burden onto current generations. A comparison based on a social welfare function indicates a marginal superiority of tax smoothing.

The Scandinavian welfare states are mature in the sense of having a high level of standards for public provisions of welfare services as well as a high replacement level for income transfers, especially for low income groups. In this welfare model, individuals have basic rights to welfare services and social transfers independently of their ability to pay, their labour market history etc. The financial viability of the model relies on a high tax burden and a high level of labour force participation for males and females. Evaluated on the basis of international comparisons of income levels and inequality, the model has performed well. In a forward looking perspective, however, the welfare model faces problems that may bring the financial viability of the model at stake. Two important challenges are demographic changes and the so-called growth dilemma (increased demand for services and leisure). We discuss these issues using Denmark as an example and argue that while these two challenges may be of the same order of magnitude, it is easier to propose solutions to the demographic challenges than to the growth dilemma which are consistent with the basic principles of the welfare state.

Based on generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy. A strategy of tax smoothing is found to successfully distribute the financial burden associated with population ageing across generations, but this happens at the cost of a sharp increase in public debt along the transition path. This can be avoided if a strategy of debt smoothing is followed, but this shifts the financial burden onto current generations. A comparison based on a social welfare function indicates a marginal superiority of tax smoothing.

The sustainability of the fiscal policy program is evaluated given the major increase in the demographic ageing and the derived increase in the public expenditures. The proportion of elderly in the population is expected to increase by 55 percent until 2040. At the same time the absolute size of the labor force is expected to be reduced by 7.5 percent measured in the potential number of working hours. The introduction and the extension of the fully funded labor market pension schemes on the other hand generates an expected increase in the income tax base due to the fact that present contributions to the system is deductible in current income before taxation whereas future receipts from the pension system are taxable. A measure of fiscal sustainability, called the sustainable tax-rate, is introduced. Using the computable general equilibrium model of Statistics Denmark, DREAM it is calculated that the sustainable tax-rate is 2.8 percentage points higher than the actual tax rate in 2003. The taxation of future receipts from the fully financed pension schemes account for 40 percent of the increase in the expenditures relative to GDP. The public net-debt will increase substan-tially from 2020 and converge to 67 percent of GDP in the long run. As most of the increase will take place in the period from 2020 to 2040, we expect that, in practice, this scenario will imply increased cost of finance for the public sector. To reduce the problem measures of reduced public spending and incentives to increase labor supply are needed. We find that a permanent increase in the rate of fertility will not reduce the fiscal burden. In fact the sustainable tax-rate is higher in this case. The same result is true for increased immigration, where immigrants are assumed to have the same labor market behavior as the current stock of immigrants.