The Nordic Model - Embracing globalization and sharing risks

tem is seriously affected. Today, there is roughly one person older
than 65 for 4 persons in the working age (or between 15 and 65),
but in 2040 there will be almost two above 65 for 4 persons in
the working age. That is, the old-age dependency ratio is almost
going to double.
The “official” assessment of the financial consequence of
these shifts is the one made by the Ministry of Finance (2006).
Age-related expenditures (pensions, health care, long-term care,
education and unemployment) are projected to increase by some
5 percentage points of GDP between now and 2050. Assuming
an unchanged overall tax rate, the general government primary
balance 1 will deteriorate significantly, cf. figure 4.7. The projected
situation is one of systematic budget deficits, and the situation is
not sustainable (public debt would be growing to 120 per cent of
GDP by 2050).
The size of the “sustainability gap” is measured by the ministry
by the permanent improvement in the annual budget needed to
ensure that the debt level in 2050 is the same as today. It turns
out that the needed improvement of the general government financial
balance corresponds to 1.5 per cent of GDP. The cyclically
adjusted budget surplus would thus have to be significantly bigger
than presently foreseen or projected. Achieving fiscal sustainability
in the long run (well beyond 2050) would require a permanent
strengthening of the budget more than twice of that size. Thus,
fiscal sustainability will require a substantial improvement of public
finances.
There are two important aspects to note about the message
of figure 4.7. First, the precise numbers are not very interesting in
themselves. Clearly there is uncertainty, and the more so the longer
into the future the projections are extended. The relevant point is
not the specific number but the proposition that systematic deficits
are likely to emerge – and this conclusion is robust to a number of
changes in the underlying assumptions of the calculations (see figure
4.7). Second, the calculations reported here are conservative:
they only illustrate the consequences of given welfare arrangements
and tax rates when the age compositon of the population changes.
It is implicitly assumed that there are no improvements in public
services in the future – which is hardly a realistic assumption.
Ageing populations
are a main factor leading
to unsustainable
finances
The long-term financial
outlook of the
public sector may be
worse than projected
72 · The Nordic Model