The COM fiscal sustainability

analysis framework
Stéphanie Pamies Sumner
European Commission
ECFIN.C2 - Sustainability of Public Finances

10th Annual Meeting of the OECD Network of Parliamentary

Budget Officials and Independent Fiscal Institutions

Seoul, 3 July 2018

Substantial debt increases, and uneven
deleverage across the euro area
Government debt ratio (% of GDP)
140 SGP enters into force First SGP reform 6-pack, 2-pack,
TSCG
GFC
120

100

80

60

40

20

2008
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2010

2012

2014

2016
Euro area Germany Spain France Italy
Source: Ameco
 Although global developments are
even less benign
Government debt ratio (% of GDP)
300
Global financial crisis Projections
250

200

150

100

50

0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027

Euro area (COM) United States (WEO) Japan (WEO)

China (WEO) Brazil (WEO)

Source: European Commission (DSM Spring 2018),

IMF (WEO April 2018)
 Fiscal sustainability in the EU,
an evolving challenge
2013: new
IMF MAC DSA
framework
2005: 2011:
2012-13:
First 'Six-Pack"
TSCG and
reform of (including
'Two-Pack'
the SGP MIP)

2000-01: 2012:
2011:
First long- 2006: FSR 2014: 2017:
First Debt 2015:
term First COM integrating COM DSA
Sustainability FSR fully First release
budgetary Fiscal EWS & risk- framework
Monitor integrating of the DSM
projections Sustainability based (Occasional
(internal approach DSA (annual
(costs of Report (FSR) paper) publication)
report)
ageing)

2009:
2010-12:
Global
EA sovereign
financial
debt crisis
crisis
 COM fiscal sustainability analysis
in the EU surveillance framework today

Treaties' provisions and

policy recommendations

Council European
conclusions Semester -
Stability and Country-specific
Growth Pact recommendations
MTO and SGP related
Analysis
adjustment path CSRs related to
Fiscal pensions, health-
Margin of
Sustainability care and long-term
discretion
Report (every care
three years) (DBP) SCP
assessment
Debt
Sustainability
Monitor (once a
Comprehensive year)
sustainability
analysis (regularly Country Reports
(once a year)
updated, including
impact of population Ageing Report
ageing) (every three years)
 What are the key features of the COM
fiscal sustainability framework?

 A comprehensive
and multidimensional
approach

 A consistent
framework across all
countries (common
assumptions and
methodologies)

 A timely
assessment of fiscal
sustainability (updates
twice a year)
COM fiscal sustainability framework:
a multidimensional approach

SHORT-TERM RISKS MEDIUM-TERM RISKS LONG-TERM RISKS

•S0 indicator - early- •S1 indicator •S2 indicator
detection model based •Debt projections •Sensitivity analysis
on outturn data of 25 (deterministic and •Realism tools
macro-fiscal variables stochastic)
•Financial markets' •Realism tools
information •Debt profile
•Gross financing needs'
projections
•Contingent liabilities

Overall risk classification by time

dimension
 Short-term risk of fiscal distress:
vulnerabilities in some countries

S0 overall indicator S0, sub-indexes

0.9 0.7

0.8
0.6
0.7 CY
Threshold fin.-comp. sub-index
0.5

Fin.-comp. index 2017

0.6

0.5 S0 threshold 0.4

SK
BG UK PT
LT
LV PL
0.4 IE IT
0.3 DK
CZ HU
EE HR BE
0.3 ES
0.2 NL
SE RO
0.2 SI
LU FR
0.1 FI
0.1 MT AT
Threshold fiscal sub-index
0 0 DE
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
EE
LT
LV

ES
LU

PL
SE

SK
DE

AT

HR
FR

PT
MT
FI

NL
SI
DK

IE

IT
UK
HU
CZ
RO

BG
BE

CY

Fiscal index 2017

2009 2017

Source: European Commission (Spring 2018)

At 'unchanged' policies, government
debt ratios projected to remain high in
several countries
Government debt ratio, baseline and SGP scenarios, euro area
and high-debt euro area countries (% of GDP)
120
projections

100

80
pre-crisis levels

60
SGP threshold

40
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Euro area (baseline scenario)
Highly indebted countries (baseline scenario)
Euro area (SGP scenario)
Highly indebted countries (SGP scenario)

Source: European Commission (Spring 2018)

 DSA overall risk assessment,
selected countries
Fiscal Sensitivity to
Crisis legacy
performance shocks

Source: European Commission (Spring 2018)

Across Benchmark values for Realism of fiscal

scenarios Debt trajectory
debt level assumptions

Probability of debt
Size of uncertainties
stabilisation
 Over the long-term, fiscal challenges
linked to population ageing in most
countries
Long-term fiscal gap indicator Public pension benefit ratio (%)
(S2 indicator, pps. of GDP) 70
10
60
8
50
High risk
6
40
4
30
Medium risk
2
20
0
10
-2
0

LT
LV

EE

LU

EU
EA
ES
UK

HU

SK
HR

SE
PL

IE

SI

NL
PT
DK
DE
FR

AT

FI
MT

IT
RO

BG

CZ

BE
CY
-4
ES
EE
LT

LV

LU
PT
HR

FR
SE

PL

IE
DK

DE
IT

SK

MT
AT
FI
NL

UK

HU

SI
CY

BG

CZ
BE

RO

2016 2070

Gap to debt-stabilizing primary balance Cost of ageing S2 indicator

Relatively low and/or decreasing benefit ratio

Source: European Commission (Spring 2018), Ageing Report 2018

 Fiscal stance: a clear dichotomy has
emerged in the euro area
3

2
Unused fiscal space

Low debt/
positive SB High debt/
1 countries DE positive SB
countries
LU MT
Structural balance (%potGDP, 2017)

NL CY
0
High debt countries/
negative SB
FI AT
-1 LT
EE
IE
BE
SI
LV SK
PT
-2
IT
FR

-3 Low debt/ ES
negative SB
countries
Significant adjustment
still needed
-4
0 20 40 60 80 100 120 140
Gross debt (%GDP, 2017)
Far-reaching fiscal policies are necessary
to ensure fiscal sustainability
 Rebuild fiscal buffers in high-debt Country-Specific Recommendations
countries (e.g. IT, PT, BE, ES and 2018, public finances,
FR), while using fiscal policy to selected EA countries
increase investment in others (e.g. Country SGP- Long- Other
DE and NL) related term fiscal-
CSR fiscal related
• Improve fiscal frameworks (e.g. sust. CSR
CSR
BE)
BE X X X
• Reform pension and health-care
systems (e.g. LU, SI and MT) DE X* X
• Make taxation and expenditure more ES X X
efficient (e.g. AT, BE, FR and PT) FR X X* X
• Improving tax rules and IT X X X
administration (e.g. FR, DE and
LU X
LT)
MT X X
• Strengthen the financial sector
and reduce NPLs (e.g. CY, MT, IE NL X* X
and IT) PT X X X
Structural reforms are also essential to
support growth and sustainability
Overview of Country-specific recommendations in 2018-19 by policy area
 References
• European Commission (2018), "Debt Sustainability Monitor 2017", European
Economy Institutional Paper 071, January
• European Commission (2016), "Fiscal Sustainability Report 2015", European
Economy Institutional Paper 018, January
• Pamies Sumner, S. and Berti, K. (2017), "A complementary tool to monitor fiscal
stress in European economies, European Economy Discussion Paper 49, June
• Berti, K. Colesnic, E., Desponts, C., Pamies, S. and Sail, E. (2016), "Fiscal
reaction functions for European Union countries", European Economy Discussion
Paper 28, April
• Benczur, P., K. Berti, J. Cariboni, F.E. Di Girolamo, S. Langedijk, A. Pagano, and
M. Petracco Giudici (2015), "Banking stress scenarios for public debt projections",
European Economy Economic Paper 548, April
• European Commission (2014), "Assessing public debt sustainability in EU
Member States: a guide", European Economy Occasional Paper 200,
September
• Berti K. (2013), "Stochastic public debt projections using the historical variance-
covariance matrix approach for EU countries", European Economy Economic
Paper 480, April
• Berti K., M. Salto and M. Lequien (2012), "An early-detection index of fiscal stress
for EU countries", European Economy Economic Paper 475, December
 Thank you for your
attention

https://ec.europa.eu/info/publi
cations/debt-sustainability-
monitor-2017_en
Long-term fiscal challenges could
even be more severe if some risks
materialized
S2 indicator (alternative scenarios, pps. of GDP), EA countries
S2 indicator - Baseline scenario S2 indicator - AWG risk scenario S2 indicator - Historial SPB scenario
of w ich of w ich of w ich
Health Long Health Long Health Long
Pensions Pensions Pensions
care term care care term care care term care
BE 4.3 1.9 0.3 1.3 5.9 1.9 0.7 2.5 3.6 2.0 0.4 1.3
DE 1.6 1.5 0.5 0.4 3.1 1.5 1.1 1.3 2.2 1.6 0.6 0.4
EE 0.6 -1.3 0.2 0.3 2.7 -1.2 0.8 1.8 0.3 -1.3 0.2 0.4
IE 3.1 1.5 0.8 1.6 4.7 1.5 1.3 2.6 5.7 1.6 0.9 1.7
ES 2.4 -0.7 0.5 1.0 4.4 -0.7 0.9 2.6 2.3 -0.7 0.5 1.0
FR 1.0 -1.9 0.4 0.5 3.1 -2.0 0.9 2.1 1.1 -2.0 0.4 0.6
IT 1.8 -0.1 0.8 0.9 2.7 -0.1 1.1 1.5 1.4 -0.1 0.8 0.9
CY -1.3 1.9 0.3 0.2 0.5 1.8 0.4 1.8 1.3 1.9 0.3 0.2
LV 1.1 -1.7 0.4 0.1 3.6 -1.7 1.3 1.7 1.2 -1.8 0.4 0.1
LT 0.7 -1.0 0.3 0.8 3.0 -1.1 0.9 2.6 2.1 -1.1 0.4 0.9
LU 8.5 5.7 0.8 2.1 10.4 5.7 1.1 3.6 7.6 6.0 0.8 2.2
MT 2.8 1.8 1.9 1.0 5.2 1.8 3.1 2.2 5.1 1.9 2.0 1.1
NL 3.0 0.4 0.6 2.0 4.9 0.4 1.0 3.4 3.0 0.5 0.6 2.1
AT 2.9 0.6 1.1 1.4 4.4 0.5 1.6 2.3 3.2 0.6 1.1 1.5
PT 0.7 -0.7 1.7 0.6 2.3 -0.7 2.3 1.5 3.9 -0.7 1.8 0.6
SI 6.1 3.4 0.8 0.7 8.4 3.4 1.5 2.3 7.2 3.6 0.9 0.7
SK 2.4 0.7 1.0 0.5 4.4 0.7 2.0 1.4 4.8 0.8 1.0 0.5
FI 2.9 0.1 0.5 1.6 4.0 0.2 1.0 2.2 1.0 0.1 0.6 1.7

Source: European Commission (Spring 2018), Ageing Report 2018

 Evolution of 'compliance' with key
SGP targets through time

Headline balance (% of GDP), EU Structural balance in real-time (% of GDP),

EU-15
10 10
SGP enters into force SGP 1st GFC SGP reforms SGP 1st GFC SGP reforms
reform reform

5 5

0 0

-5 -5

-10 -10

-15 -15
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Ameco, Commission services

 Fiscal map: Sustainability and
stabilisation challenges

5.0 Favourable cyclical conditions

4.0 SI
Output gap (% of potential GDP)

Good times
CY
3.0
EE

ES
LT
2.0 LV
NL

PT
SK
1.0 LU FI
DE AT FR IT

times
IE BE
MT
0.0
S1 indicator

Normal
Fiscal scope Fiscal sustainability issues
-1.0

-2.0
-9.0 -8.0 -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
Unfavourable cyclical conditions