Long-Term Spending Pressures in Europe
Departmental Papers, March 14, 2025
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Bibliographic details
- Authors: Stephanie Eble, Alexander Pitt, Irina Bunda, Oyun Erdene Adilbish, Nina Budina, Gee Hee Hong, Moheb T Malak, Sabiha Mohona, Alla Myrvoda, Keyra Primus
- Published: March 14, 2025
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9798400295805.087
Executive summary and key projections
- European countries face high, rising, and long-lasting spending pressures that require renewed focus on fiscal policy and comprehensive structural reforms.
- Five key spending-pressure areas: pensions; healthcare/long-term care driven by population aging; climate transition; increased defense spending; and higher borrowing costs.
- Some pressures are immediate, others will build up over time.
- Projections: additional expenditures could reach 5¾ percent of GDP annually by 2050 in Advanced Europe and 8 percent in Central, Eastern, and Southeastern Europe (CESEE).
Main findings
- Spending pressures add to existing fiscal consolidation needs and are imminent and growing across Europe.
- Population aging is a primary driver of rising pension and healthcare/long-term care spending.
- Climate transition requires fiscal action and fiscal instruments such as carbon pricing.
- Increased defense spending and higher borrowing costs further strain budgets.
- Distributional impacts of reforms are significant; policymakers must consider effects on vulnerable households.
- Enhanced institutional capacity and comprehensive analysis and data are needed to inform public debate and national decision-making.
- Raising awareness and implementing necessary reforms will be challenging but essential; inaction risks fiscal sustainability and the fulfillment of priority spending needs.
Policy recommendations and reform agenda
- Implement a broad reform agenda tailored to country circumstances, including:
- Urgent actions in many countries to ensure the sustainability of pension systems.
- Use fiscal instruments (for example, carbon pricing) to combat climate change and support the climate transition.
- Increase revenue mobilization, particularly in CESEE, to create fiscal space for priority expenditures.
- Reduce inefficient spending to free resources for high-priority needs.
- Strengthen fiscal institutions and enhance institutional capacity to manage long-term spending pressures.
- Strengthen the EU's fiscal capacity to provide common public goods, including climate, defense, energy security, and R&D.
- Implement structural reforms to enhance growth potential and improve sustainability of public finances.
- Design a well-structured fiscal framework that incorporates long-term spending pressures and is supported by comprehensive analysis and data to guide national decision-making.
Implications for fiscal policy and public debate
- Policymakers must balance managing spending, ensuring adequate revenue, and meeting environmental, social, and security objectives.
- Distributional considerations, especially impacts on vulnerable households, should be central to reform design.
- A combination of increased revenues, spending reprioritization, and structural reforms is necessary to address projected pressures.
- Timely, country-specific action is required to avoid threats to fiscal sustainability and to ensure fulfillment of priority spending needs.
Departmental Papers 2025, "Long-Term Spending Pressures in Europe" — Stephanie Eble, Alexander Pitt, Irina Bunda, Oyun Erdene Adilbish, Nina Budina, Gee Hee Hong, Moheb T Malak, Sabiha Mohona, Alla Myrvoda, Keyra Primus (March 14, 2025).
Content in this bundle
- Long-Term Spending Pressures in Europe; IMF Departmental Paper No. DP/2025/002; March, 2025