## _wp07187 - 1. Fiscal Positions as of 2005

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---

### I. Introduction — key findings
- Ensuring long-run fiscal sustainability in G-7 countries requires a substantial fiscal adjustment averaging 3–4 percentage points of GDP.  
- Without fiscal adjustment, projected increases in age-related spending imply explosive debt dynamics in all seven countries.  
- There are significant growth benefits to putting public finances on a sustainable footing in the near term versus delayed adjustment.  
- Obtaining a consistent set of cross-country estimates for future age-related spending pressures is an important priority for future research.

### II. Evolution of age-related expenditures
- By 2050, old-age dependency ratios in most G-7 countries are projected to double; United Nations projections show the old-age population increasing by 80 percent on average in G-7 countries.  
- National-authority projections: general government age-related spending in G-7 countries is expected to rise by an average of 4 percentage points of GDP over the next 45 years, with substantial cross-country variation.  
- Cross-country range in projected increases in age-related spending (2005–2050):
  - Canada: 9 percentage points of GDP  
  - France: 3.3 percentage points of GDP  
  - Germany: 3.2 percentage points of GDP  
  - Italy: 1.9 percentage points of GDP  
  - Japan: 2.2 percentage points of GDP  
  - United Kingdom: 4.1 percentage points of GDP  
  - United States: 5.9 percentage points of GDP  
  - G-7 average: 4.2 percentage points of GDP  
- The bulk of the projected spending increase is expected to come from additional health costs, with long-term care and pension spending accounting for the remainder.  
- Methodological differences across projection sources complicate comparisons; the paper stresses attention to “worse case” scenarios in addition to a “medium” scenario.

### III. Indicators for assessing fiscal sustainability
- Two primary-gap indicators are used:
  - Debt-target primary gap: difference between current primary fiscal balance and the primary balance required to reach a target gross public debt-to-GDP ratio in a certain year (target in the paper: 60 percent of GDP by 2050).  
  - Intertemporal primary gap: change in the primary balance required to equate the present discounted value of future primary balances to the current level of debt (stabilizes debt at a permanently sustainable level).
- Each indicator comprises three components:
  - Primary deficit component: the initial cyclically-adjusted general government primary deficit (a 1 percentage point of GDP increase in primary balance reduces both primary-gap indicators by 1 percentage point).  
  - Debt component: debt servicing costs of the initial debt stock (a 1 percentage point increase in the initial debt stock increases both indicators by a factor related to the growth-adjusted interest rate).  
  - Aging component: net present value of projected increase in age-related expenditures times the growth-adjusted interest rate (impact is non-linear; depends on time profile and assumed growth-adjusted interest rate).
- Closing the debt-target gap (e.g., 60 percent in 2050) can still yield explosive debt dynamics thereafter; closing the intertemporal gap stabilizes debt permanently.

### IV. Data and assumptions
- Age-related expenditure projections sources: Economic Policy Committee (2006) for EU members; OECD (2001) for Canada, Japan, and the United States.  
- Projections are interpolated linearly between available dates; after 2050 age-related expenditures are assumed to stay constant. All other non-interest expenditures and revenues are assumed constant throughout the projection period.  
- Baseline growth-adjusted interest rate assumption: 2 percent for all countries and years. Sensitivity analysis includes a 1 percent growth-adjusted interest rate; replacing 2 percent with 1 percent does not substantially change results.  
- Public debt and primary fiscal surplus data source: OECD Economic Outlook database. Cyclically adjusted fiscal balance from OECD is used. Both gross and net government debt data are used; the OECD gross–net debt difference averages 33 percentage points of GDP in G-7, and is 87 percentage points in Japan.

### V. Fiscal positions as of 2005 (exact figures)
- Canada:
  - Gross Debt in Percent of GDP, end-2005 = 70.8  
  - Net Debt in Percent of GDP, end-2005 = 30.2  
  - Structural Primary Balance in Percent of GDP, 2005 = 5.5  
  - Projected Increase in Age-Related Spending in Percentage Points of GDP, 2005-50 = 9.0
- France:
  - Gross Debt = 76.1  
  - Net Debt = 43.7  
  - Structural Primary Balance = -0.2  
  - Projected Increase = 3.3
- Germany:
  - Gross Debt = 71.1  
  - Net Debt = 51.5  
  - Structural Primary Balance = 0.1  
  - Projected Increase = 3.2
- Italy:
  - Gross Debt = 120.4  
  - Net Debt = 95.1  
  - Structural Primary Balance = 1.4  
  - Projected Increase = 1.9
- Japan:
  - Gross Debt = 173.1  
  - Net Debt = 86.4  
  - Structural Primary Balance = -3.0  
  - Projected Increase = 2.2
- United Kingdom:
  - Gross Debt = 46.7  
  - Net Debt = 40.0  
  - Structural Primary Balance = -1.5  
  - Projected Increase = 4.1
- United States:
  - Gross Debt = 61.8  
  - Net Debt = 43.5  
  - Structural Primary Balance = -1.8  
  - Projected Increase = 5.9
- Average:
  - Gross Debt = 88.6  
  - Net Debt = 55.8  
  - Structural Primary Balance = 0.1  
  - Projected Increase = 4.2

### VI. Estimation results: primary gaps in 2005 (components and reported values)
- Target date for debt-target primary gap: 2050. Growth-adjusted interest rate assumptions: 2 percent (baseline) and 1 percent (sensitivity).  
- Intertemporal primary gap and contributions (percent of GDP) — reported components: Primary Balance contribution, Debt Service contribution, Aging Costs contribution; Intertemporal Primary Gap reported for Net Debt and Gross Debt calculations. Exact reported figures include:

  - Canada:
    - Primary Balance = 5.5; Debt Service = -1.4; Aging Costs = -6.3  
    - Intertemporal Primary Gap (Gross Debt) = -2.3; Intertemporal Primary Gap (Net Debt) = -0.5; Debt Target Primary Gap = -2.3
  - France:
    - Primary Balance = -0.2; Debt Service = -1.5; Aging Costs = -2.3  
    - Intertemporal Primary Gap (Gross Debt) = -3.7; Intertemporal Primary Gap (Net Debt) = -3.5; Debt Target Primary Gap = -3.4
  - Germany:
    - Primary Balance = 0.1; Debt Service = -1.4; Aging Costs = -1.4  
    - Intertemporal Primary Gap (Gross Debt) = -3.0; Intertemporal Primary Gap (Net Debt) = -2.1; Debt Target Primary Gap = -1.7
  - Italy:
    - Primary Balance = 1.4; Debt Service = -2.4; Aging Costs = -2.4  
    - Intertemporal Primary Gap (Gross Debt) = -1.3; Intertemporal Primary Gap (Net Debt) = -2.5; Debt Target Primary Gap = -1.0
  - Japan:
    - Primary Balance = -3.0; Debt Service = -3.4; Aging Costs = -3.4  
    - Intertemporal Primary Gap (Gross Debt) = -6.5; Intertemporal Primary Gap (Net Debt) = -9.0; Debt Target Primary Gap = -5.6
  - United Kingdom:
    - Primary Balance = -1.5; Debt Service = -0.9; Aging Costs = -0.9  
    - Intertemporal Primary Gap (Gross Debt) = -5.1; Intertemporal Primary Gap (Net Debt) = -3.6; Debt Target Primary Gap = -5.1
  - United States:
    - Primary Balance = -1.8; Debt Service = -1.3; Aging Costs = -1.3  
    - Intertemporal Primary Gap (Gross Debt) = -7.4; Intertemporal Primary Gap (Net Debt) = -6.1; Debt Target Primary Gap = -7.2
  - G-7 Average:
    - Primary Balance = 0.1; Debt Service = -1.8; Aging Costs = -1.8  
    - Intertemporal Primary Gap (Gross Debt) = -4.2; Intertemporal Primary Gap (Net Debt) = -3.9; Debt Target Primary Gap = -3.9

- Interpretation:
  - Attaining a gross debt ratio of 60 percent of GDP by 2050 would require an average improvement in the primary balance by 3.9 percentage points of GDP across the seven countries.  
  - Closing the intertemporal primary gap requires an average adjustment estimated at 3.9 to 4.5 percentage points of GDP (depending on net vs. gross debt).  
  - Almost two-thirds of required adjustment reflects the expected increase in age-related spending (aging component); the remaining one-third reflects interest on public debt (debt component).  
  - The largest primary gaps are for Japan and the United States; the smallest gap is for Canada due to a 5.5 percent of GDP primary surplus in 2005.

### VII. Deterioration in fiscal sustainability, 2001–05
- Rolling estimates of the intertemporal primary gaps indicate a deterioration averaging 2.7 percentage points of GDP for the G-7 countries over 2001–2005.  
- Only Japan exhibited an improvement in the indicator over the five-year period, though the end-2005 position for Japan is still estimated as unsustainable.  
- The primary fiscal balance deteriorated by 2.8 percentage points of GDP during 2001–05.
  - The largest change occurred in the U.K. and the U.S., each with a deterioration in the primary balance by 5½ percentage points of GDP.  
  - In 2001, fiscal balance components for all countries except Japan were supportive of fiscal sustainability (providing additional fiscal space to absorb future aging pressures).

### VIII. Decomposition of intertemporal primary gap changes, 2001–05
- The intertemporal primary gap is decomposed into:
  - changes in the cyclically-adjusted primary fiscal balance;  
  - changes in the debt-to-GDP ratio; and  
  - a demographic component tied to changes in long-term age-related expenditure projections.
- Contribution magnitudes during 2001–05:
  - Primary fiscal balance component: deterioration of 2.8 percentage points of GDP (main driver).  
  - Public debt component: deterioration on average by 0.1 percentage points of GDP; improved in Canada, the U.K. and Italy; in Japan, increase in gross public debt added 0.6 percentage points of GDP to the primary gap.  
  - Demographic component: improvement by ¼ percentage points on average during 2001–05.
    - France: 2003 reforms reduced the primary gap by 0.9 percentage points.  
    - Germany and Italy: recent pension reforms reduced the primary gap by 0.4 percentage points of GDP each.

### IX. Recent reforms and estimated fiscal impacts (selected reported findings)
- Pension reforms produced notable fiscal savings over the past five years; health care reforms less so. Selected reported results:
  - France: 2003 pension reform reduced 2020 (2050) spending by 0.9 (1.2) percent of GDP; projected 2050 debt stock effect: 57 percent of GDP.  
  - Germany: 2004 pension and health care reforms improved debt-target primary gap by 0.24 percent of GDP and intertemporal primary gap by 0.44 percent of GDP in 2009; projected 2050 debt stock effect: 20 percent of GDP.  
  - Italy: 2004 pension reform reduced annual pension spending by 0.6 percent of GDP between 2012 and 2035, but raised spending by 0.1 percent of GDP thereafter; projected 2050 debt stock effect: 21 percent of GDP.  
  - Japan: 2004 pension and 2006 health care reforms reduced annual spending by gradually up to 3 percent of GDP in 2025; savings then stable until 2050; projected 2050 debt stock effect: 113 Percent of GDP.  
  - U.S.: No major reforms; 0.3 percent of GDP increase in the projected 2040 level of spending on social security, Medicare, and Medicaid between 2000 and 2006 projections; projected 2050 debt stock effect: n.a.  
  - Canada, U.K.: n.a. or no major reforms reported.
- EU Commission projection comparison (2001 vs 2006 rounds):
  - Projected 2050 level of public spending on pensions and health care fell for France and Germany, increased for Italy and the U.K.  
  - Direction of change consistent with this paper for France, Germany, and the U.K.; for Italy, this paper suggests improvement while the European Commission indicates deterioration (difference likely due to methodological changes).

### X. Robustness: alternative target years for debt-target indicator
- Shortening the target horizon can raise or lower the debt-target primary gap depending on initial debt stock and timing of age-related spending pressures.  
- For the average G-7 country, required fiscal adjustment is on average about ½ percentage points of GDP higher if the target date is changed from 2050 to 2015.  
- Reported debt-target primary gap (Percent of GDP) for target years 2015 / 2030 / 2050:
  - Canada: 2.0 / 0.0 / -0.5  
  - France: -3.1 / -3.4 / -3.5  
  - Germany: -1.3 / -1.6 / -2.1  
  - Italy: -6.1 / -3.0 / -2.5  
  - Japan: -16.9 / -10.8 / -9.0  
  - United Kingdom: -0.9 / -2.8 / -3.6  
  - United States: -3.9 / -5.7 / -6.1  
  - G7 average: -4.3 / -3.9 / -3.9
- Cross-country variation: when target year changes from 2050 to 2015, primary gap doubles from 9 percent to 17 percent of GDP for Japan; for most other countries (except Italy) it declines.

### XI. Robustness: alternative debt targets
- The primary gap is a linear function of the chosen debt target for a given growth-adjusted interest rate.  
- Impact of lowering debt target compared to baseline 60 percent of GDP:
  - Lowering debt target by 10 percent of GDP: -0.14 (percent of GDP) impact on debt-target primary gap.  
  - Lowering debt target by 20 percent of GDP: -0.28 (percent of GDP) impact.

### XII. Robustness: alternative scenarios for age-related expenditures
- An upward revision in aging costs of 1 percentage point of GDP on average raises the estimated need for fiscal adjustment by 0.7 percentage point of GDP.  
- Sensitivity to updated OECD projections (average of “cost containment” and “cost pressure” scenarios for health expenditures) for countries with OECD (2001) baseline:
  - Using OECD (2006) updates changes estimated primary gaps by:
    - Canada: Baseline -0.7 ; +1 percent scenario -0.3  
    - Japan: Baseline -0.7 ; OECD (2006) average -2.1  
    - United States: Baseline -0.7 ; OECD (2006) average +0.4  
    - G-7 Average: Baseline -0.7
  - The Japan result driven by increase in projected health and long-term care spending in OECD (2006) to 5.5 percent of GDP from 2.2 percent of GDP in the original study.  
- Given some countries’ aging projections differed by more than 2½ percentage points of GDP, the impact on required fiscal adjustment can be material.

### XIII. Robustness: alternative growth-adjusted interest rate assumptions
- Changing the growth-adjusted interest rate affects the primary gaps via:
  - higher interest rate increases interest-cost component of the primary gap; and  
  - higher interest rate reduces the net present value of future age-related expenditures (reduces aging component).
- Reducing the growth-adjusted interest rate from 2 to 1 percent reduces the intertemporal primary gap by 0.3 percentage point of GDP overall.
  - Effect breakdown for the G-7 average: 0.9 percentage points reduction in interest service on debt and a 0.6 percentage points increase in NPV of aging costs (net -0.3).
- Country-specific effects (Effect on Intertemporal Primary Gap of Reducing the Growth-Adjusted Interest Rate by 1 Percentage Point; Percent of GDP):
  - Canada: Total effect -0.5 ; Interest service on debt 0.7 ; NPV of aging costs -1.2  
  - France: Total effect 0.3 ; Interest service on debt 0.7 ; NPV of aging costs -0.4  
  - Germany: Total effect 0.0 ; Interest service on debt 0.7 ; NPV of aging costs -0.6  
  - Italy: Total effect 0.9 ; Interest service on debt 1.2 ; NPV of aging costs -0.3  
  - Japan: Total effect 1.4 ; Interest service on debt 1.7 ; NPV of aging costs -0.3  
  - United Kingdom: Total effect -0.2 ; Interest service on debt 0.4 ; NPV of aging costs -0.7  
  - United States: Total effect -0.1 ; Interest service on debt 0.6 ; NPV of aging costs -0.7  
  - G-7 Average: Total effect 0.3 ; Interest service on debt 0.9 ; NPV of aging costs -0.6

### XIV. Macroeconomic modeling and policy timing (Global Fiscal Model and scenarios)
- The IMF’s Global Fiscal Model (GFM) is used to examine macroeconomic consequences of adjusting fiscal policy now versus delaying adjustment by ten years; GFM is an overlapping-generations general equilibrium multi-country model developed at the IMF to examine macroeconomic and structural fiscal policy issues, including pension reform.  
- Two scenarios to restore fiscal sustainability by closing the intertemporal primary gap:
  - Near-term adjustment scenario: close the intertemporal primary gap over a period of five years (adjustment spread over five years).  
  - Delayed adjustment scenario: no fiscal policy change for ten years (age-related spending pressures accrue), then reassess and close the reassessed primary gap over the following five years.
- Consolidations modeled rely on increases in payroll taxes. GFM features highlighted:
  - finitely-lived overlapping generations; liquidity-constrained households; distortionary labor and income taxes; monopolistic competition; multicountry setting; rich menu of taxes.
- Main conclusions from the GFM analysis:
  - Delaying fiscal consolidation generally results in a substantial increase in public debt.
    - Exception: Canada, where a large initial primary surplus allows steady debt reduction even when consolidation is delayed.  
    - Largest debt increase occurs in Japan, explained by relatively high initial debt and fiscal deficit levels.
  - Delaying adjustment and allowing debt to increase implies the need to run permanently higher primary surpluses to service higher interest costs.
  - Implementing the adjustment over the next five years is substantially less costly than postponing consolidation and is associated with long-run output gains.
    - Short-run (first five years) effects of early adjustment:
      - Early adjustment results in lower growth by an average of 0.4 percentage points per year compared with the no-adjustment scenario.  
      - The cumulative undiscounted output cost over the first five years of the early adjustment scenario averages 1.8 percentage points of GDP relative to the no-adjustment scenario.  
      - The initial contraction primarily reflects lower household consumption in response to higher payroll taxes and a decline in labor supply.
    - Medium term (next 10 years after adjustment completion):
      - After completing the adjustment in five years, the economy grows faster by an average of 0.3 percentage points per year over the next 10 years compared with the delayed adjustment scenario.  
      - The delayed adjustment scenario involves lower growth due to increasing crowding out effects and a substantial increase in payroll taxes starting in the sixth year.
    - Long run:
      - After 15 years, growth in the two scenarios converges to the same value.  
      - In the long-run, the faster growth in the early adjustment scenario implies a GDP level about 1.9 percent higher than in the delayed adjustment scenario.  
      - The long-run estimated benefit of early adjustment is largest for Japan where early adjustment prevents a substantial increase in debt and yields an estimated output gain of 3.8 percentage points of GDP.  
      - Aggregate estimate: Early adjustment is estimated to deliver a permanent output gain of about 2 percent of GDP on average.
- Reported numerical example and stylized relationships (preserved exactly):
  - Stylized example parameters:
    - Initial primary deficit: 1 percent of GDP.  
    - Initial debt stock: 90 percent of GDP.  
    - Debt target: 60 percent of GDP.  
    - Growth adjusted interest rate: 2 percent.  
    - Aging costs increase linearly by 5 percent of GDP during 2005–50 and stay constant beyond 2050.  
    - If target year for debt-target indicator is 2050 then α = 0.41.  
  - With chosen parameters:
    - An increase in initial debt stock by 1 percentage point of GDP will reduce the intertemporal indicator by 0.020 percentage point of GDP and the debt-target indicator by 0.035 percentage points of GDP.  
    - A similar increase in the debt target will raise the debt-target indicator by 0.014 percentage points of GDP.  
    - Debt-target indicator requires a fiscal adjustment of about 5½ percentage points of GDP, while the intertemporal indicator produces a needed adjustment of 6 percentage points of GDP.  
  - Table 8 (stylized example components, Percent of GDP):
    - Intertemporal Primary Gap: Deficit -1.0; Debt -1.8; Aging -3.3; Primary gap -6.1.  
    - Debt-target Primary Gap: Deficit -1.0; Debt -2.2; Aging -2.2; Primary gap -5.4.

### XV. Main conclusions and policy implications
- Rising longevity, falling fertility rates, and retirement of the baby boom generation will substantially raise age-related government spending in most advanced and many emerging market countries.  
- Pension and health care reforms undertaken in G-7 countries in recent years have generated substantial savings, but fiscal sustainability overall deteriorated in most G-7 countries during 2001—2005, mainly reflecting deteriorating primary fiscal balances.  
- The large adjustments required in the baseline scenario are subject to significant upside risks, notably uncertainties surrounding long-term age-related expenditure projections.  
- Policy implications:
  - Early fiscal adjustment delivers significant long-run growth benefits versus delayed adjustment.  
  - Postponing adjustment increases the size of the fiscal adjustment required to restore sustainability.  
  - Early fiscal adjustment would provide greater fiscal space to absorb any higher-than-expected age-related expenditure needs.  
  - Early adjustment would also address inter-generational equity considerations by ensuring that the “baby boomer” generation bears some of the adjustment burden (intergenerational equity not explicitly evaluated using a welfare criterion in this paper).

*Italic: Source — _wp07187 - 1. Fiscal Positions as of 2005 (chapter/section text and tables).*

### 1. Fiscal Positions as of 2005..........................................................................................

### _wp07187 - 1. Fiscal Positions as of 2005..........................................................................................

### I. Introduction — key findings
- Ensuring long-run fiscal sustainability in G-7 countries requires a substantial fiscal adjustment averaging 3–4 percentage points of GDP.  
- Without fiscal adjustment, projected increases in age-related spending imply explosive debt dynamics in all seven countries.  
- There are significant growth benefits to putting public finances on a sustainable footing in the near term versus delayed adjustment.  
- Obtaining a consistent set of cross-country estimates for future age-related spending pressures is an important priority for future research.

### II. Evolution of age-related expenditures
- By 2050, old-age dependency ratios in most G-7 countries are projected to double; United Nations projections show the old-age population increasing by 80 percent on average in G-7 countries.  
- National-authority projections: general government age-related spending in G-7 countries is expected to rise by an average of 4 percentage points of GDP over the next 45 years, with substantial cross-country variation.  
- Cross-country range in projected increases in age-related spending (2005–2050):  
  - Canada: 9 percentage points of GDP  
  - France: 3.3 percentage points of GDP  
  - Germany: 3.2 percentage points of GDP  
  - Italy: 1.9 percentage points of GDP  
  - Japan: 2.2 percentage points of GDP  
  - United Kingdom: 4.1 percentage points of GDP  
  - United States: 5.9 percentage points of GDP  
  - G-7 average: 4.2 percentage points of GDP  
- The bulk of the projected spending increase is expected to come from additional health costs, with long-term care and pension spending accounting for the remainder.  
- Methodological differences across projection sources complicate comparisons; the paper stresses attention to “worse case” scenarios in addition to a “medium” scenario.

### III. Indicators for assessing fiscal sustainability
- Two primary-gap indicators are used:  
  - Debt-target primary gap: difference between current primary fiscal balance and the primary balance required to reach a target gross public debt-to-GDP ratio in a certain year (target in the paper: 60 percent of GDP by 2050).  
  - Intertemporal primary gap: change in the primary balance required to equate the present discounted value of future primary balances to the current level of debt (stabilizes debt at a permanently sustainable level).  
- Each indicator comprises three components:  
  - Primary deficit component: the initial cyclically-adjusted general government primary deficit (a 1 percentage point of GDP increase in primary balance reduces both primary-gap indicators by 1 percentage point).  
  - Debt component: debt servicing costs of the initial debt stock (a 1 percentage point increase in the initial debt stock increases both indicators by a factor related to the growth-adjusted interest rate).  
  - Aging component: net present value of projected increase in age-related expenditures times the growth-adjusted interest rate (impact is non-linear; depends on time profile and assumed growth-adjusted interest rate).  
- Closing the debt-target gap (e.g., 60 percent in 2050) can still yield explosive debt dynamics thereafter; closing the intertemporal gap stabilizes debt permanently.

### IV. Data and assumptions
- Age-related expenditure projections sources: Economic Policy Committee (2006) for EU members; OECD (2001) for Canada, Japan, and the United States.  
- Projections are interpolated linearly between available dates; after 2050 age-related expenditures are assumed to stay constant. All other non-interest expenditures and revenues are assumed constant throughout the projection period.  
- Baseline growth-adjusted interest rate assumption: 2 percent for all countries and years. Sensitivity analysis includes a 1 percent growth-adjusted interest rate; replacing 2 percent with 1 percent does not substantially change results.  
- Public debt and primary fiscal surplus data source: OECD Economic Outlook database. Cyclically adjusted fiscal balance from OECD is used. Both gross and net government debt data are used; the OECD gross–net debt difference averages 33 percentage points of GDP in G-7, and is 87 percentage points in Japan.

### V. Fiscal positions as of 2005 (Table 1 — exact figures)
- Canada: Gross Debt in Percent of GDP, end-2005 = 70.8; Net Debt in Percent of GDP, end-2005 = 30.2; Structural Primary Balance in Percent of GDP, 2005 = 5.5; Projected Increase in Age-Related Spending in Percentage Points of GDP, 2005-50 = 9.0  
- France: Gross Debt = 76.1; Net Debt = 43.7; Structural Primary Balance = -0.2; Projected Increase = 3.3  
- Germany: Gross Debt = 71.1; Net Debt = 51.5; Structural Primary Balance = 0.1; Projected Increase = 3.2  
- Italy: Gross Debt = 120.4; Net Debt = 95.1; Structural Primary Balance = 1.4; Projected Increase = 1.9  
- Japan: Gross Debt = 173.1; Net Debt = 86.4; Structural Primary Balance = -3.0; Projected Increase = 2.2  
- United Kingdom: Gross Debt = 46.7; Net Debt = 40.0; Structural Primary Balance = -1.5; Projected Increase = 4.1  
- United States: Gross Debt = 61.8; Net Debt = 43.5; Structural Primary Balance = -1.8; Projected Increase = 5.9  
- Average: Gross Debt = 88.6; Net Debt = 55.8; Structural Primary Balance = 0.1; Projected Increase = 4.2

### VI. Estimation results: primary gaps in 2005 (Table 2 — exact figures and decomposition)
- Target date for debt-target primary gap: 2050. Growth-adjusted interest rate assumptions: 2 percent (baseline) and 1 percent (sensitivity).  
- Intertemporal primary gap and contributions (percent of GDP) — reported components: Primary Balance contribution, Debt Service contribution, Aging Costs contribution; Intertemporal Primary Gap reported for Net Debt and Gross Debt calculations. Exact figures:

  - Canada:  
    - Contributions to Intertemporal Primary Gap (Gross Debt) from: Primary Balance = 5.5; Debt Service = -1.4; Aging Costs = -6.3; Intertemporal Primary Gap (Gross Debt) = -2.3; Intertemporal Primary Gap (Net Debt) = -0.5; Debt Target Primary Gap = -2.3; (other reported numbers in table row: -1.4, -2.2)  
  - France:  
    - Intertemporal Primary Gap (Net Debt) = -3.5; Primary Balance = -3.4; Debt Service = -4.0; Intertemporal Primary Gap (Gross Debt) = -3.7; Debt Target Primary Gap = -3.4; Aging Costs = -2.3; (table values include -0.2, -1.5, -2.3)  
  - Germany:  
    - Intertemporal Primary Gap (Net Debt) = -2.1; Primary Balance = -2.7; Debt Service = -3.0; Intertemporal Primary Gap (Gross Debt) = -3.0; Debt Target Primary Gap = -1.7; Aging Costs = -1.4; (table values include 0.1, -1.4, -1.7)  
  - Italy:  
    - Intertemporal Primary Gap (Net Debt) = -2.5; Primary Balance = -1.7; Debt Service = -2.2; Intertemporal Primary Gap (Gross Debt) = -1.3; Debt Target Primary Gap = -1.0; Aging Costs = -2.4; (table values include 1.4, -2.4, -1.2)  
  - Japan:  
    - Intertemporal Primary Gap (Net Debt) = -9.0; Primary Balance = -6.2; Debt Service = -7.9; Intertemporal Primary Gap (Gross Debt) = -6.5; Debt Target Primary Gap = -5.6; Aging Costs = -3.4; (table values include -3.0, -3.4, -1.6)  
  - United Kingdom:  
    - Intertemporal Primary Gap (Net Debt) = -3.6; Primary Balance = -4.8; Debt Service = -4.9; Intertemporal Primary Gap (Gross Debt) = -5.1; Debt Target Primary Gap = -5.1; Aging Costs = -0.9; (table values include -1.5, -0.9, -2.5)  
  - United States:  
    - Intertemporal Primary Gap (Net Debt) = -6.1; Primary Balance = -6.9; Debt Service = -7.3; Intertemporal Primary Gap (Gross Debt) = -7.4; Debt Target Primary Gap = -7.2; Aging Costs = -1.3; (table values include -1.8, -1.3, -4.2)  
  - Average (G-7):  
    - Intertemporal Primary Gap (Net Debt) = -3.9; Primary Balance = -3.9; Debt Service = -4.5; Intertemporal Primary Gap (Gross Debt) = -4.2; Debt Target Primary Gap = -3.9; Aging Costs = -1.8; (table values include 0.1, -1.8, -2.8)

- Interpretation from table and text: attaining a gross debt ratio of 60 percent of GDP by 2050 would require an average improvement in the primary balance by 3.9 percentage points of GDP across the seven countries. Closing the intertemporal primary gap requires an average adjustment estimated at 3.9 to 4.5 percentage points of GDP (depending on net vs. gross debt). Almost two-thirds of required adjustment reflects the expected increase in age-related spending (aging component); the remaining one-third reflects interest on public debt (debt component). The largest primary gaps are for Japan and the United States; the smallest gap is for Canada due to a 5.5 percent of GDP primary surplus in 2005.

### VII. Macroeconomic modeling and policy timing (Global Fiscal Model — summary)
- The IMF’s Global Fiscal Model (GFM) is used to examine macroeconomic consequences of adjusting fiscal policy now versus delaying adjustment by ten years; GFM is an overlapping-generations general equilibrium multi-country model developed at the IMF to examine macroeconomic and structural fiscal policy issues, including pension reform.  
- The analysis compares projected effects on GDP of bringing fiscal policy onto a sustainable trajectory within the next five years versus postponing adjustment for ten years. The paper finds significant growth benefits to earlier adjustment.

*Italic: Source — _wp07187 - 1. Fiscal Positions as of 2005 (chapter/section text and tables).*

### 0.14 percentage points of GDP. Shortening the target horizon from 2050 to 2015 implies the need for an

### _wp07187 - 0.14 percentage points of GDP. Shortening the target horizon from 2050 to 2015 implies the need for an

### Deterioration in fiscal sustainability, 2001–05
- Rolling estimates of the intertemporal primary gaps indicate a deterioration averaging 2.7 percentage points of GDP for the G-7 countries over 2001–2005.
- Only Japan exhibited an improvement in the indicator over the five-year period, though the end-2005 position for Japan is still estimated as unsustainable.
- The primary fiscal balance deteriorated by 2.8 percentage points of GDP during 2001–05.
  - The largest change occurred in the U.K. and the U.S., each with a deterioration in the primary balance by 5½ percentage points of GDP.
  - In 2001, fiscal balance components for all countries except Japan were supportive of fiscal sustainability (providing additional fiscal space to absorb future aging pressures).

### Decomposition of intertemporal primary gap (components and contributions)
- The intertemporal primary gap is decomposed into:
  - changes in the cyclically-adjusted primary fiscal balance;
  - changes in the debt-to-GDP ratio; and
  - a demographic component tied to changes in long-term age-related expenditure projections.
- Contribution magnitudes during 2001–05:
  - Primary fiscal balance component: deterioration of 2.8 percentage points of GDP (main driver).
  - Public debt component: deterioration on average by 0.1 percentage points of GDP; improved in Canada, the U.K. and Italy; in Japan, increase in gross public debt added 0.6 percentage points of GDP to the primary gap.
  - Demographic component: improvement by ¼ percentage points on average during 2001–05.
    - France: 2003 reforms reduced the primary gap by 0.9 percentage points.
    - Germany and Italy: recent pension reforms reduced the primary gap by 0.4 percentage points of GDP each.

### Recent reforms and estimated fiscal impacts (summary of reported findings)
- Pension reforms produced notable fiscal savings over the past five years; health care reforms less so.
- Selected country findings from Table 3 (reported results of external studies and projected effects on debt):
  - France: 2003 pension reform reduced 2020 (2050) spending by 0.9 (1.2) percent of GDP; projected 2050 debt stock effect: 57 percent of GDP.
  - Germany: 2004 pension and health care reforms improved debt-target primary gap by 0.24 percent of GDP and intertemporal primary gap by 0.44 percent of GDP in 2009; projected 2050 debt stock effect: 20 percent of GDP.
  - Italy: 2004 pension reform reduced annual pension spending by 0.6 percent of GDP between 2012 and 2035, but raised spending by 0.1 percent of GDP thereafter; projected 2050 debt stock effect: 21 percent of GDP.
  - Japan: 2004 pension and 2006 health care reforms reduced annual spending by gradually up to 3 percent of GDP in 2025; savings then stable until 2050; projected 2050 debt stock effect: 113 Percent of GDP.
  - U.S.: No major reforms; 0.3 percent of GDP increase in the projected 2040 level of spending on social security, Medicare, and Medicaid between 2000 and 2006 projections; projected 2050 debt stock effect: n.a.
  - Canada, U.K.: n.a. or no major reforms reported.

- EU Commission projection comparison (2001 vs 2006 rounds) — lower part of Table 3:
  - Projected 2050 level of public spending on pensions and health care fell for France and Germany, increased for Italy and the U.K.
  - Direction of change consistent with this paper for France, Germany, and the U.K.; for Italy, this paper suggests improvement while the European Commission indicates deterioration (difference likely due to methodological changes).

### Robustness: alternative target years for debt-target indicator
- Shortening the target horizon can raise or lower the debt-target primary gap depending on initial debt stock and timing of age-related spending pressures.
- For the average G-7 country, required fiscal adjustment is on average about ½ percentage points of GDP higher if the target date is changed from 2050 to 2015.
- Reported specific values (Table 4: Debt-Target Primary Gap for 60 Percent Debt-to-GDP Ratio Target; Percent of GDP):
  - 2015 / 2030 / 2050
  - Canada: 2.0 / 0.0 / -0.5
  - France: -3.1 / -3.4 / -3.5
  - Germany: -1.3 / -1.6 / -2.1
  - Italy: -6.1 / -3.0 / -2.5
  - Japan: -16.9 / -10.8 / -9.0
  - United Kingdom: -0.9 / -2.8 / -3.6
  - United States: -3.9 / -5.7 / -6.1
  - G7 average: -4.3 / -3.9 / -3.9
- Cross-country variation: when target year changes from 2050 to 2015, primary gap doubles from 9 percent to 17 percent of GDP for Japan; for most other countries (except Italy) it declines.

### Robustness: alternative debt targets
- The primary gap is a linear function of the chosen debt target for a given growth-adjusted interest rate.
- Impact of lowering debt target compared to baseline 60 percent of GDP (Table 5):
  - Lowering debt target by 10 percent of GDP: -0.14 (percent of GDP) impact on debt-target primary gap.
  - Lowering debt target by 20 percent of GDP: -0.28 (percent of GDP) impact.

### Robustness: alternative scenarios for age-related expenditures
- An upward revision in aging costs of 1 percentage point of GDP on average raises the estimated need for fiscal adjustment by 0.7 percentage point of GDP.
- Sensitivity to updated OECD projections (average of “cost containment” and “cost pressure” scenarios for health expenditures) for countries with OECD (2001) baseline:
  - Using OECD (2006) updates changes estimated primary gaps by:
    - Canada: Baseline -0.7 ; +1 percent scenario -0.3
    - Japan: Baseline -0.7 ; OECD (2006) average -2.1
    - United States: Baseline -0.7 ; OECD (2006) average +0.4
    - G-7 Average: Baseline -0.7
  - The Japan result driven by increase in projected health and long-term care spending in OECD (2006) to 5.5 percent of GDP from 2.2 percent of GDP in the original study.
- Given some countries’ aging projections differed by more than 2½ percentage points of GDP, the impact on required fiscal adjustment can be material.

### Robustness: alternative growth-adjusted interest rate assumptions
- Changing the growth-adjusted interest rate affects the primary gaps via:
  - higher interest rate increases interest-cost component of the primary gap; and
  - higher interest rate reduces the net present value of future age-related expenditures (reduces aging component).
- Reducing the growth-adjusted interest rate from 2 to 1 percent reduces the intertemporal primary gap by 0.3 percentage point of GDP overall.
  - Effect breakdown for the G-7 average: 0.9 percentage points reduction in interest service on debt and a 0.6 percentage points increase in NPV of aging costs (net -0.3).
- Country-specific effects (Table 7: Effect on Intertemporal Primary Gap of Reducing the Growth-Adjusted Interest Rate by 1 Percentage Point; Percent of GDP):
  - Canada: Total effect -0.5 ; Interest service on debt 0.7 ; NPV of aging costs -1.2
  - France: Total effect 0.3 ; Interest service on debt 0.7 ; NPV of aging costs -0.4
  - Germany: Total effect 0.0 ; Interest service on debt 0.7 ; NPV of aging costs -0.6
  - Italy: Total effect 0.9 ; Interest service on debt 1.2 ; NPV of aging costs -0.3
  - Japan: Total effect 1.4 ; Interest service on debt 1.7 ; NPV of aging costs -0.3
  - United Kingdom: Total effect -0.2 ; Interest service on debt 0.4 ; NPV of aging costs -0.7
  - United States: Total effect -0.1 ; Interest service on debt 0.6 ; NPV of aging costs -0.7
  - G-7 Average: Total effect 0.3 ; Interest service on debt 0.9 ; NPV of aging costs -0.6
- Cross-country variation reflects differences in debt stocks and aging costs; for example, a 1 percentage point lower growth-adjusted rate lowers the primary gap by 1.4 percentage points of GDP for Japan but only by 0.9 percentage points for Italy; Canada, the U.K., and the U.S. see the estimated adjustment need widen slightly.

### Delayed versus immediate fiscal adjustment: macroeconomic effects (scenarios and main conclusions)
- Two scenarios to restore fiscal sustainability by closing the intertemporal primary gap:
  - Near-term adjustment scenario: close the intertemporal primary gap over a period of five years (adjustment spread over five years).
  - Delayed adjustment scenario: no fiscal policy change for ten years (age-related spending pressures accrue), then reassess and close the reassessed primary gap over the following five years.
- Analysis uses the IMF’s Global Fiscal Model (GFM) calibrated to baseline age-related spending projections; consolidations modeled rely on increases in payroll taxes.
- Three main conclusions:
  - Delaying fiscal consolidation generally results in a substantial increase in public debt (Figure 4 results for G-7 and average).
    - Exception: Canada, where a large initial primary surplus allows steady debt reduction even when consolidation is delayed.
    - Largest debt increase occurs in Japan, explained by relatively high initial debt and fiscal deficit levels.
  - Delaying adjustment and allowing debt to increase implies the need to run permanently higher primary surpluses to service higher interest costs (Figure 5).
  - [Text truncated in source at end of provided content; further quantitative results from Figures 4 and 5 not included in supplied content.]

*Italicized source attribution: IMF working paper content unit _wp07187 (excerpt).*

### 1.1 percentage points of GDP higher in the long run than in the immediate adjustment

### 1.1 percentage points of GDP higher in the long run than in the immediate adjustment scenario

### Long-run primary balance and required adjustments
- The required additional long-run increase in the primary balance is most striking for Japan, where it is estimated at 2½ percentage points of GDP.
- The simulation does not take into account the Japanese authorities’ plans to achieve primary balance (excluding social security) by 2011, which would result in a lower debt profile.
- As of 2005, the estimated fiscal adjustment required to ensure long-run fiscal sustainability is substantial for all G-7 countries:
  - Ensuring fiscal sustainability would require an average improvement in the primary balance of about 4 percentage points of GDP.
- The paper assesses fiscal sustainability using two standard primary gap indicators:
  - Debt-target primary gap: measures the difference between the current primary fiscal balance and the primary fiscal balance required to reach a target gross public debt-to-GDP ratio in a certain year.
  - Intertemporal primary gap: measures the change in the primary balance required to equate the present discounted value of future primary balances to the current level of debt (stabilizes debt at a permanently sustainable level).
- Key quantitative relationships and definitions (preserved as in source):
  - pd0 is the initial primary deficit.
  - d-1 is the initial debt stock.
  - dT is the debt target at target period T.
  - r is the growth adjusted interest rate assumed constant.
  - NPV is the discounted value of projected future change in the primary balance.
  - α, 10≤α≤1, depends on the growth adjusted interest rate and the target year.
- Stylized example parameters and results (preserved exactly):
  - Initial primary deficit: 1 percent of GDP.
  - Initial debt stock: 90 percent of GDP.
  - Debt target: 60 percent of GDP.
  - Growth adjusted interest rate: 2 percent.
  - Aging costs increase linearly by 5 percent of GDP during 2005–50 and stay constant beyond 2050.
  - If target year for debt-target indicator is 2050 then α = 0.41.
  - An increase in initial debt stock by 1 percentage point of GDP will reduce the intertemporal indicator by 0.020 percentage point of GDP and the debt-target indicator by 0.035 percentage points of GDP.
  - A similar increase in the debt target will raise the debt-target indicator by 0.014 percentage points of GDP.
  - With chosen parameters, debt-target indicator requires a fiscal adjustment of about 5½ percentage points of GDP, while the intertemporal indicator produces a needed adjustment of 6 percentage points of GDP.
  - For both indicators the deficit component contributes with 1 percentage point of GDP.
- Table 8 (stylized example components, Percent of GDP):
  - Intertemporal Primary Gap: Deficit -1.0; Debt -1.8; Aging -3.3; Primary gap -6.1.
  - Debt-target Primary Gap: Deficit -1.0; Debt -2.2; Aging -2.2; Primary gap -5.4.

### Effects on economic activity: immediate versus delayed adjustment
- Implementing the adjustment over the next five years is substantially less costly than postponing consolidation and is associated with long-run output gains.
- Short-run (first five years) effects of early adjustment:
  - Early adjustment results in lower growth by an average of 0.4 percentage points per year compared with the no-adjustment scenario.
  - The cumulative undiscounted output cost over the first five years of the early adjustment scenario averages 1.8 percentage points of GDP relative to the no-adjustment scenario.
  - The initial contraction primarily reflects lower household consumption in response to higher payroll taxes and a decline in labor supply.
- Medium term (next 10 years after adjustment completion):
  - After completing the adjustment in five years, the economy grows faster by an average of 0.3 percentage points per year over the next 10 years compared with the delayed adjustment scenario.
  - The delayed adjustment scenario involves lower growth due to increasing crowding out effects and a substantial increase in payroll taxes starting in the sixth year.
- Long run:
  - After 15 years, growth in the two scenarios converges to the same value.
  - In the long-run, the faster growth in the early adjustment scenario implies a GDP level about 1.9 percent higher than in the delayed adjustment scenario.
  - The long-run output gain accrues due to higher labor supply on account of lower payroll taxes, and to higher investment reflecting lower debt and smaller crowding out effects.
  - The long-run estimated benefit of early adjustment is largest for Japan where early adjustment prevents a substantial increase in debt and yields an estimated output gain of 3.8 percentage points of GDP.
- Aggregate estimate:
  - Early adjustment is estimated to deliver a permanent output gain of about 2 percent of GDP on average.

### Global Fiscal Model (GFM) and modeling features
- The Global Fiscal Model (GFM) is a multicountry dynamic general equilibrium model based on the New Open Economy Macroeconomics (NOEM) tradition, designed to examine fiscal policy issues, and particularly suitable for studying temporary or permanent changes in taxes or expenditures.
- GFM introduces non-Ricardian features via three channels:
  - Finitely-lived overlapping generations.
  - Liquidity-constrained households that consume all disposable income every period.
  - Distortionary labor and income taxes affecting incentives to consume and invest.
- Additional GFM features:
  - Monopolistic competition so short-term output is partly demand-driven and fiscal policy can have short-term effects on production.
  - Multicountry setting to analyze international spillover effects as changes in government debt influence world interest rates.
  - A rich menu of taxes permitting analysis of alternative fiscal-consolidation strategies.
  - Underlying model parameters not expected to be affected by fiscal sustainability considerations are kept constant across countries.

### Main conclusions and policy implications
- Rising longevity, falling fertility rates, and retirement of the baby boom generation will substantially raise age-related government spending in most advanced and many emerging market countries.
- Pension and health care reforms undertaken in G-7 countries in recent years have generated substantial savings, but fiscal sustainability overall deteriorated in most G-7 countries during 2001—2005, mainly reflecting deteriorating primary fiscal balances.
- The large adjustments required in the baseline scenario are subject to significant upside risks, notably uncertainties surrounding long-term age-related expenditure projections.
- Policy implications:
  - Early fiscal adjustment delivers significant long-run growth benefits versus delayed adjustment.
  - Postponing adjustment increases the size of the fiscal adjustment required to restore sustainability.
  - Early fiscal adjustment would provide greater fiscal space to absorb any higher-than-expected age-related expenditure needs.
  - Early adjustment would also address inter-generational equity considerations by ensuring that the “baby boomer” generation bears some of the adjustment burden (intergenerational equity not explicitly evaluated using a welfare criterion in this paper).

*Source: IMF Working Paper content as provided in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07187.pdf_