Age-Related Spending May Push Sovereign Debt in Advanced Economies to Unsustainable Levels, Says Report

Oct 08, 2010, 09:12 ET from Standard & Poor's

MADRID, Oct. 8 /PRNewswire/ -- Government debt burdens in most advanced economies could reach unsustainable levels of over 300% of GDP in the next 40 years, without fresh measures to address long-term age-related spending trends, according to a new study by Standard & Poor's Ratings Services. The report, titled "Global Aging 2010: An Irreversible Truth," and published on RatingsDirect, updates Standard & Poor's 2007 study on the sustainability of public finances in the light of demographic change and now covers 49 countries, totaling more than two-thirds of the world's population. To accompany the report, we also published a supplement on the methodology and sources used in our calculations, "Global Aging 2010: An Irreversible Truth--Methodological And Data Supplement."

In our view, population aging will lead to profound changes in economic growth prospects for countries around the world, and lead to heightened budgetary pressures from greater age-related spending needs. Without appropriate budgetary adjustments, further pension and health-care systems reforms, or structural measures to improve sovereigns' economic growth potential, our projections--which are based on national government estimates, as well as those of the European Union, the OECD, and the IMF--suggest that the future debt burden of the majority of sovereigns included in the study would increase to historically unprecedented levels.

"No other force is likely to shape the future of national economic health, public finances, and national policies as the irreversible rate at which the world's population is growing older," said Standard & Poor's credit analyst Marko Mrsnik. "The projected deterioration in public finances between now and 2050 is particularly significant in advanced economies, whereas many emerging market sovereigns outside of Europe will have a slightly more positive trajectory. In these cases population aging is projected to take place against the background of relatively higher economic growth than in advanced sovereigns. However, as the emerging sovereigns develop, with associated widespread changes to the social fabric, government welfare spending may grow faster than GDP as has been the trend in advanced economies during the last half of the 20th century."

Under our hypothetical scenario of unchanged policies and a continuation of current aging-dependent public expenditure programs (and associated interest payments), fiscal deficits and government debt is projected to increase rapidly from the middle of this decade. Some key numerical findings of our 2010 study include:

  • The median country deficit may rise from 5.3% of GDP (the advanced sovereigns' median, 5.7% of GDP; the emerging market sovereigns' median, 4.7%) to more than 6% (7.4%; 3.1%) of GDP by the mid-2020s, assuming no policy change.

  • The median general government net debt burden may increase to almost 50% of GDP through to 2020 (the advanced sovereigns median, 78%; the emerging market sovereigns median 38%), and accelerate thereafter. By the 2030s, the median net debt burden may be at almost 90% of GDP (115% for advanced sovereigns; 60% for emerging markets), and accelerate to above 260% of GDP by 2050 (329% for advanced sovereigns; 126% for emerging market sovereigns).

  • The economic size of the state may increase significantly: Government spending may rise to almost 60% (68%; 46.4%) of GDP in 2050, from 44% (46.7%; 38.3%) today.

This hypothetical scenario is not Standard & Poor's prediction of result. It is highly unlikely that governments will allow debt and deficit burdens to spiral out of control in the manner outlined above or that the creditors would be willing to underwrite such debt burden. Nevertheless, the scenario reveals the dimension of the task facing governments in reducing benefits granted by unfunded state-run social security systems or achieving further fiscal belt-tightening.

The 2010s had been described in previous Standard & Poor's reports as the window of opportunity in which to address aging-related challenges to the sustainability of public finances. Governments, particularly in the advanced and emerging European economies, have been increasingly undertaking reforms to contain related budgetary risks. However, the onset of the financial crisis has interrupted their efforts to manage this burden. The rapid build-up of government debt since 2007 has, in our view, strengthened the case to frontload reforms aimed at containing sovereign budget risks, especially in countries with high expected future increases in age-related spending.

"To contain the related budgetary risks, an increasing number of sovereigns have been undertaking reform of pension or health-care systems. However, as the study shows, the projected magnitude of future fiscal burden will, in our view, require additional effort," Mr. Mrsnik concluded.

The report is available to RatingsDirect subscribers on the Global Credit Portal at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.

SOURCE Standard & Poor's



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