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Honorable State?

Honorable States? EU Sustainability Ranking 2013

The new EU Sustainability Ranking 2013, which Stiftung Marktwirtschaft (Foundation Market Economy) presented in Berlin on November 28, 2013, gives an overview on the long-term perspectives of the public budgets of the EU Member States. In almost all countries the sustainability gap (sum of explicit and implicit debt) is still many times higher than economic output. Therefore, the consolidation process and the implementation of structural reforms must remain top priority in the EU and most Member States.

International Comparison of Public Debt (in % of GDP): Sustainability Ranking – Update 2013

Sources: European Commission, AMECO Database, Eurostat. Calculations: Research Centre for Generational Contracts (Forschungszentrum Generationenverträge)

Honorable States? EU Sustainability Ranking 2013 English Summary

Honorable States: Sustainability Ranking – Update 2012

On December 6, 2012, Stiftung Marktwirtschaft (Market Economy Foundation) presented an extended update of the European sustainability ranking with the following results:

International Comparison of Public Debt (in % of GDP): Sustainability Ranking – Update 2012

Sources: European Commission, AMECO Database, Eurostat. Calculations: Forschungszentrum Generationenverträge

Honorable States? The Sustainability of European Public Finances in Times of Crisis English Summary

2012 Generational Balance Sheet Update: Focus on Demography and Labour Markets

Our new results of the German generational balance sheet demonstrate that the sustainability gap, which serves as an indicator of the true value of public debt, has fallen to 230 percent of the gross domestic product (GDP). In other terms, the total value of public debt today is estimated at approximately €5.7 trillion. Implicit state debt, which, at 147 percent of GDP, comprises the lion’s share of total public debt, consists primarily of unfunded social security liabilities. These unfunded liabilities exist because our government has promised its citizens more services in the future – in the form of pensions, health care, and nursing care, among others – but has failed to raise the revenue from taxation or insurance contributions that is necessary to pay for these new services. The rest of the sustainability gap – 83.2% of GDP – consists of explicit state debt.

The positive development is due less to the policy of the federal government and more to the growth in the economy and the concurrent growth in tax and social contribution revenue. In fact, when examining the policies of the government for 2012, the government’s role in this decline becomes even clearer: when examined in terms of long-term sustainability, the federal government’s tax and social security plan for 2012, which includes tax cuts, long-term care reform, a pension package, and a new home care subsidy, is misguided as it in fact raises the sustainability gap, to 253 percent of GDP.

Honorable State? 2012 Generational Balance Sheet Update: Focus on Demography and Labour Markets Argument 117

Authors: Bernd Raffelhüschen, Stefan Moog

Honorable States? Actual Public Debt in Europe: A Comparison

The ongoing debt crisis in Europe demonstrates the disastrous economic effects a high level of public debt can wreak on a country. Moreover, official statistics concerning public debt, on which public discussion often centers, comprises only a small part of total public debt. As nearly all governments enter into binding liabilities for the future – particularly in the form of state-run pension and health schemes – without raising the revenue required to pay for these future fiscal obligations. It is already clear that the continuation of the status quo will result in a situation in which governments, due to low receipts and high liabilities, are unable to make good on their promises. One contributing factor to this situation is the demographic change underway in many European countries. The gap between future revenue streams and future liabilities that the state has already agreed to pay refers to implicit or “hidden” debt.

In our new international comparative study of the sustainability of public finances, we take a realistic look at the actual level of public debt in the twelve founding members of the Eurozone (Euro – 12 states) and consider both explicit and implicit debt. Together, these two figures comprise the so-called “sustainability gap.”

State Debt: An International Comparison

Source: European Commission, AMECO Database, Eurostat.  Calculations performed by Forschungszentrum Generationenverträge.

Source: European Commission, AMECO Database, Eurostat. Calculations performed by Forschungszentrum Generationenverträge.

The sustainability rankings demonstrate that the traditional method of calculating and considering debt, which is employed by the Maastricht Criteria, conveys a picture that is far too optimistic. There are also very large differences in the rankings, depending on whether one considers explicit debt or the entire sustainability gap. Italy’s low implicit debt, for example, pushes the country to a surprising first place in sustainability rankings. The model EU country, Luxembourg, on the other hand, employs a lavish yet unfunded pension system that pushes it down to the second-to-last place.

Honorable States? Actual Public Debt in Europe: A Comparison Study No. 115 English Summary

Authors: Bernd Raffelhüschen, Stefan Moog

2011 Generational Balance Sheet Update: Focus on Long-Term Care Reform

The new 2011 update of the German generational balance sheet – in which the effects of future demographic change’s interaction with public social commitments are considered when calculating debt – shows a small positive change in Germany’s long-term public finances. The visible, explicit public debt rose to a record 80% of the gross domestic product (GDP). At the same time, however, the invisible, implicit public debt, which primarily comprises unfunded social liabilities that will be paid in future years, sank in response to a growth in revenues, which were driven higher by the overall health of the German economy. In total, the current sustainability gap – comprising both explicit and implicit state debts – remains high at €6.6 trillion or, in other terms, 275% of GDP. Despite the progress made in reducing public debt, there remains a great deal of need for well-considered reform and consolidation before one can call Germany a truly “honorable state” with sustainable fiscal policies.

You Can Only See the Tip of the Iceberg: Sustainability Gap Sinks by a Third of GDP

Nur die Spitze des Eisbergs ist sichtbar – Nachhaltigkeitslücke sinkt um ein Drittel des BIP

Social long-term care is, in view of the long-term financial sustainability of social programs, a program in dire need of reform. As such, it forms the focus of this year’s generational balance sheet update. While improvements and expansions of long-term care services through a redefinition of eligibility requirements is being discussed in political circles, the real challenge lies ahead: we must devise reforms for the long-term care system that ensures the system’s viability over the coming decades, during which the number of those requiring care is expected to double. As a financially convincing and a socially balanced policy reform, we propose the introduction of a waiting period, defined as a period of time without services between qualification for long-term care and the beginning of insurance payments.

Honorable State? The 2011 Generational Balance Sheet Update. What Long-Term Care Reform Can, and Should, Bring. Study No. 114

Honorable State?

One year of black and yellow: sustainability negative

An analysis founded in long-term accounting

The Market Economy Foundation presents its fiscal sustainability report for the first years of the black-yellow governing coalition. The result is alarming. In comparison to the long-term unfunded shortfall of 291% of gross domestic product (GDP) inherited from the Grand Coalition in 2009, the gap has climbed to 308% of GDP today. This figure measures large: three times the size of Germany’s annual economic output, or €7.4 trillion. Nevertheless, a systematic restructuring of the components of this future liability, as well as comprehensive health reform, could begin to improve this situation. In order for this to happen, the ruling coalition has to engage in more courageous reform of public spending.

Even if such an effort is successful, further reform, particularly to the health care system, must follow. “So far, the black-yellow federal government has simply continued the idleness of the last decade when it comes to health care policy,” opined Prof. Dr. Bernd Raffelhüschen, board member of the Market Economy Foundation and director of the Intergenerational Contract Research Center at Freiburg University (Forschungszentrum Generationenverträge an der Universität Freiburg), at our press conference on October 19, 2010.


One year of black and yellow: sustainability negative

Slides (German)

Press Release (German)

Honorable State? Generational Balance Sheet Update 2010

The Market Economy Foundation presents an update of the generational balance sheet and analyzes different models for health care reform to test their viability and to estimate the tax increases necessary to fund the system.

The long-term unfunded imbalance between expected revenues and explicit and implicit state expenditures amounts to nearly €8 billion, or roughly 315% of gross domestic product, according to the latest calculation by the Market Economy Foundation and the Intergenerational Contract Research Center )(Forschungszentrum Generationenverträge). The bulk of this is driven by implicit (not yet visible) state spending that constitutes 250% of GDP and hides the costs of state liabilities, particularly the social security system, which cannot be paid for by current levels of taxation. The remaining part comprises those state liabilities that are explicit and already visible.

In order to service this debt load, every German citizen, independent of taxes and contributions to social schemes, would have to hand an additional €355 per month (€279 at 2007 debt levels) over to the state.

Grafik: Nachhaltigkeitslücken im Jahresvergleich

Prof. Dr. Bernd Raffelhüschen, board member of the Market Economy Foundation and director of the Intergenerational Contract Research Center at Freiburg University (Forschungszentrum Generationenverträge an der Unviersität Freiburg), outlined the progression of this phenomenon at a press conference on May 18, 2010 and made the following points:

  • The debt problem in Germany is much more structural than cyclical

  • The social security system has demonstrated a nearly unchanged budgetary shortfall year-over-year; in this area, there has at least been no worsening

  • There is a growing need for action in the statutory health insurance system as well as in the social nursing care insurance system.

Are flat rate health care premiums a solution?

Reform of the way in which statutory health care is financed, through the introduction of flat rate health care premiums, could lower the long term budgetary shortfall of the system by up to 30 percentage points. This would at least be a first step towards the realization of a sustainable health care system. The tax rise needed to fund the social system would, depending on the configuration of the premium system, amount to between €3.4 billion and €18.4 billion. The opaque system of redistribution that defines the current statutory health insurance system would be done away with, so as not to add to the total burden borne by private households.

A truly sustainable health reform requires more elements, for example a pro rata personal contribution for outpatient services and medication.

Reputable State? 2010 Long-Term, Balance Sheet Update: Shortfall Jumps to 8 Trillion Euro. Study Nr. 111 (German) Press Release (German)

Honorable States? International Sustainability Ranking on the Basis of Long-Term Balance Sheets – Focus on Pension Reform

The Market Economy Foundation presents an updated international sustainability ranking and considers pension reform in light of this international comparison.

How big is Germany’s long-term budget shortfall in comparison to the situation in other countries? And how do the recent German pension reforms size up internationally? The fact is that not only in Germany does demographic change pose large problems for the financing of statutory old-age security, as all countries studied have in principle trusted in the pay as you go system. And with the exception of the United Kingdom, all other countries have initiated some severe reforms to the way in which they fund old age benefits.

Tabelle: Internationales Nachhaltigkeitsranking

More information on this theme, as well on the indexation of retirement benefits, is available in the following study:

Reputable States? The German balance sheet on an international comparison Study Nr. 110 (German) Press Release (German)

Authors: Bernd Raffelhüschen, Stefan Moog, Christoph Müller

In “Incorrect Facts,” we have posed the following question:

How high would the level of state debt or, more precisely, the long-term budgetary shortfall, be today, if the Baby-boomer generation had had a similar amount of children as the previous generation?

Would the debt problem have been solved?

The answer is: no, quite the opposite. The sustainability issue would in fact be exacerbated.

Read our paper on the topic:

The Baby-boomers' purported demographic mortgage (German)

The Market Economy Foundation presents the 2009 generational balance sheet update: “Cyclical political mismanagement exacerbates sustainability issue”

How do the economic crisis and the stimulus package affect the long term sustainability of public finances? You can find the answers in our third update to our “Generational Balance Sheet,” begun in 2006. At our press conference at the beginning of July, Prof. Dr. Bernd Raffelhüschen and economist Stefan Moog quantified the burden on the public budget in detail:

Honorable State? The 2009 Generational Balance Sheet Update: Economic Crisis Affects Sustainability

Diagramm: Generationenbilanz Update 2009: Wirtschaftskrise trifft Tragfähigkeit

More information is available in the following study:

Reputable State? The Long-Term Balance Sheet
2009 Update: Economic Crisis Affects Sustainability
Study
Nr. 108 (German)
Press Release (German)

Authors: Bernd Raffelhüschen, Stefan Moog

The German long-term balance sheet in international comparison

“Switzerland exemplary, Germany just mediocre.” Such were the results of an international comparison study by the Market Economy Foundation aimed at restoring sustainability to public balance sheets. Dr. Bernd Raffelhüschen, board member of the Market Economy Foundation and director of the Intergenerational Contract Research Center at the Albert Ludwigs University (Forschungszentrum Generationenverträge an der Albert-Ludwigs-Universität), presented the study at a press conference in Berlin’s Mitte district in November 2008.

Using long-term accounting methods that also account for future demographic development, Professor Raffelhüschen studied the sustainability of public finances in seven industrialized European countries (Germany, France, Austria, Spain, the United Kingdom, Norway, and Switzerland), as well as the United States as a non-European standard of comparison. The results of the study appear in the following ranking:

Die deutsche Generationenbilanz im internationalen Vergleich.
Reputable State?
The German long-term balance sheet in international comparison
Study
Nr. 107 (German)
Press Release (German)

Authors: Bernd Raffelhüschen, Christian Hagist, Stefan Moog, Johannes Vatter

Further Publications

Reputable State?
The 2008 Long-Term Balance Sheet Update: Migration and Sustainability
Study
Nr. 103 (German)
Press Release (German)

Authors: Bernd Raffelhüschen, Christian Hagist, Stefan Moog

The Long-Term Balance Sheet –
Fire Alarm From the Future 2007 Update: Demography Hits the Economy
Study
Nr. 100 (German)
Press Release (German)

Authors: Bernd Raffelhüschen, Christian Hagist, Matthias Heidler, Jörg Schoder

Fire Alarm from the Future –
The up-to-date generational balance sheet 2006 first edition
Study
Nr. 97 (German)
Press Release (German)

Authors: Bernd Raffelhüschen, Christian Hagist, Olaf Weddige

On 15.10.2008 Prof. Dr. Bernd Raffelhüschen, member of the board of the Market Economy Foundation, delivered a policy brief to the parliamentary advisory council for sustainable development:

Generational justice in the Constitution? (German)

A QUESTION:

Would a businessman be reputable if, when taking a loan from a bank, he hid two thirds of his existing debt?

The state has not even had that much consideration for its citizens. Instead of recognizing state liabilities in their full amount, the state conceals a considerable amount of debt – more than two-and-a-half times the full annual economic output of Germany – and claims, officially, that the national debt lies at “just about” €1.5 billion.

The latest calculations of the long-term public balance sheet, however, reveal that the fiscal policy of the federal government has not been sustainable for many years; it was not even sustainable in the cyclically good years. According to the latest figures, the gap between Germany’s long term revenues and liabilities, the latter of which comprises both visible and hidden debts, has climbed and now lies at just under €8 trillion, or approximately 315% of GDP. The social security system in particular is in dire need of reform.

Methodology of the Long-Term Balance Sheet

The long-term “generational” balance sheet was developed at the beginning of the 1990s in the United States of America in order to better analyze long-term fiscal and social policies. With these methods, long-run public income and expenditure, such as retirement payments and tax receipts, are calculated with consideration of demographic development and underlying economic and fiscal conditions. The resulting indicators, such as the sustainability gap, enable a thorough analysis of the sustainability and generational consequences of current fiscal and social policies. The long-term sustainability gap comprises of explicit debt as well as implicit “hidden” debt. Implicit liabilities describe the future imbalance between receipts and expenditures and thereby reveal the extent to which, under the current law, the state will be indebted. In other words, the sustainability gap shows just how large financial reserves must be in order to maintain current levels of service into the future.

Service

Resident Expert

Dr. Guido Raddatz

Dr. Guido Raddatz

Labor Market, Social Security, and Federalism

Tel.: +49 (0)30 / 206057-32

Email: raddatz(at)stiftung-marktwirtschaft.de