The Nordic Model - Embracing globalization and sharing risks

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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
dependency ratio driven by the baby-boom effect and the increase in longevity. For the former, some consolidation makes sense; the possibility of redressing the change in fertility is bypassed and consolidation will imply that the consequences of the change in the dependency ratio are smoothened across generations. For longevity the case is different, since pre-funding would imply that current generations contribute to the financing of expenditure for future generations enjoying higher longevity. It is not obvious that this is fair. Hence, consolidation has to be combined with reforms that take the trend out of the public budget balance. This requires reforms that adapt the social contract to deal with the consequences of ageing. 80 · The Nordic Model
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The Nordic Model Embracing globaliz
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ETLA B232 ISBN 978-951-628-468-5 IS
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THE AUTHORS Torben M. Andersen is P
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CONTENTS PREFACE THE AUTHORS 1 INTR
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8.5 The future of public services -
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Globalization is primarily an oppor
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ices financed by taxes, which are h
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14, respectively, out of a total of
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are the effects of technical change
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- and, particularly, their effect o
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not contesting economic growth as t
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1.6 AN EFFECTIVE WAGE BARGAINING PR
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etter be tried in individual cases
Page 29 and 30: The scheme of the social contract c
Page 31 and 32: is worthy and realistic. But the de
Page 33 and 34: supportive interaction of openness
Page 35 and 36: The financial deregulations in the
Page 37 and 38: horizontal axis). These indices are
Page 39 and 40: does can nowadays be seen, in a bro
Page 41 and 42: employment increases in the public
Page 43 and 44: are not at the top of the league, t
Page 45 and 46: ENDNOTES 1 Wikipedia refers to popu
Page 47 and 48: consider employment and productivit
Page 49 and 50: from the mid-1980s. Finland has gra
Page 51 and 52: % 7 6 5 4 3 2 1 0 IT expenditure, %
Page 53 and 54: As technological change is to a sig
Page 55 and 56: 3.3 SOCIAL EQUALITY Economic effici
Page 57 and 58: 0.9 0.8 0.7 Net Fin Den 0.9 Composi
Page 59 and 60: ANNEX: GROWTH ACCOUNTING The Nordic
Page 61 and 62: sources of GDP growth in the EU15,
Page 63 and 64: 11 These decompositions have been c
Page 65 and 66: 4.1 THE WELFARE STATE AS A SOCIAL C
Page 67 and 68: The extent, coverage and quality of
Page 69 and 70: % % 80 80 60 60 40 20 0 OECD max Fi
Page 71 and 72: % 80 Total Old age % 80 60 60 40 40
Page 73 and 74: tem is seriously affected. Today, t
Page 75 and 76: Historically, however, the share of
Page 77 and 78: More children. Since the problem is
Page 79: Actually higher growth may make the
Page 83 and 84: 82 · The Nordic Model
Page 85 and 86: to handle much bigger fields today,
Page 87 and 88: Table 5.1 Projections of public hea
Page 89 and 90: 5.4 AN EASY FIX - BRING SERVICES BA
Page 91 and 92: Box 5.1 Growth and the welfare stat
Page 93 and 94: it implies that the long-run defici
Page 95 and 96: The level of taxation is already hi
Page 97 and 98: One may ask why this problem arises
Page 99 and 100: globalization may contribute to bot
Page 101 and 102: able to pay to seek private solutio
Page 103 and 104: 102 · The Nordic Model
Page 105 and 106: ily policies that Nordic demographi
Page 107 and 108: absolute and relative terms than hi
Page 109 and 110: in the participation decision of th
Page 111 and 112: Table 6.2 The activity rate, aggreg
Page 113 and 114: Thus, responsible unions should res
Page 115 and 116: als take part in various unemployme
Page 117 and 118: Box 6.2 What is the Danish “flexi
Page 119 and 120: ENDNOTES 1 In his history of the ec
Page 121 and 122: particularly noteworthy in a euro a
Page 123 and 124: 7.2 COORDINATION AND DECENTRALIZATI
Page 125 and 126: also depends on the business cycle.
Page 127 and 128: ut not in any dramatic way (cf. fig
Page 129 and 130: displays higher nominal rigidity th
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model stem from an age in which the
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mostly in the years 1980-2000. For
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Table 8.1 Government expenditure by
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ure. This selection bias alone will
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that everyone gets their worth as m
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8.3 THE CASE FOR GOVERNMENT PROVIDE
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maximizing firms tend to focus exce
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than zero based budgeting) are impe
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sectors, place at or above the medi
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The demands for objectivity limit w
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assessed case by case. The importan
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c. Vouchers Vouchers are issued by
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mechanically in the political debat
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ENDNOTES 1 The private sector inclu
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The biggest hurdle to overcome for
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ment has a higher return when spent
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REFERENCES Adema, W. and Ladaique,
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Jonung, L. and Hagberg, T. (2005):
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Is there a Nordic model? What are t
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