The Nordic Model - Embracing globalization and sharing risks

Current budget surpluses
are sizeable
but cannot solve the
future financing
problems
It is, however, neither advisable nor realistic to solve the entire
problem by consolidation. This is so since the needed consolidation
is large – of the order of magnitude of a permanent annual
budget improvement of several per cent of GDP – and would thus
require policy makers to run very big surpluses for a long sequence
of years to cover expenditure rises in the very distant future. Figure
4.8 illustrates the implications of a consolidation strategy in which
large budget surpluses are assumed not only for the next few years
but continuing until around 2030 so as to ensure that (modest)
deficits beyond 2030 can be financed. 2
This is not a politically realistic path. It is unlikely that policy
makers could pursue the tough fiscal policies required to raise the
present (already sizeable) budget surplus by amounts corresponding
to several percentage points of GDP for such a long sequence
of years. The combination of the public sector building up a huge
fund while citizens are increasingly insisting on increased welfare
services would easily result in a political impasse. Moreover, it is
important to distinguish between increases in the demographic
%
4
2
0
-2
-4
Primary balance with fiscal consolidation
ensuring sustainability
Primary balance in baseline projection
%
4
2
0
-2
-4
-6
2010 15 20 25 30 35 40 45 50
-6
Figure 4.8
Budget change needed to ensure long-run sustainability: consolidation
strategy 2010–2050
Source: Own calculations based on data from figure 4.7. Growth corrected real rate of interest is assumed
equal to 1 per cent.
Demographics: from tail-wind to head-wind · 79