This presentation was made by Christoph Schwierz, European Commission, at the 4th meeting of the Joint DELSA/GOV-SBO Network on Fiscal Sustainability of Health Systems, held in Paris on 16-17 February 2015.

1. Assessing the fiscal
sustainability of health and
long-term care:
the EU methodology
1
Christoph Schwierz
European Commission
Directorate General for Economic and Financial Affairs
OECD
Paris, 16-17 February 2015

2. 2
Outline
• Context
• Multidimensional approach
• What's next?

3. The concept of fiscal sustainability
3
• Sustainability of public finances traditionally viewed as solvency
of public sector:
gov't solvent if expected to honour current and future financial
obligations (on time), incl. implicit commitment to continue
providing certain public goods, services and transfers
• Present value of gov't disboursements (incl. interest
expenditure) not exceeding present value of gov't revenues
or:
• Present value of gov't revenues net of non-interest expenditure
(primary balances) at least covering existing public debt
("gov't intertemporal budget constraint")

4. The concept of fiscal sustainability
4
• Gov't implicit liabilities related to population ageing
(pensions, healthcare) accounted for in intertemporal
budget constraint
• ageing cost projections (EC–MSs) from 2012 Ageing
Report
• key for fiscal sustainability analysis/advice in the
frame of European Semester

5. Why health /long-term care spending
poses a fiscal challenge
5
• Most Member States face significant challenges to the sustainability of
public finances in medium and/or long-term
• Risk associated with health care (and long-term care) spending is
large:70% of the increase in age-related expenditure between 2010-
2060 is due to health care and long-term care
• Public spending on health care and long-term care projected
conservatively to increase by 2.7 – 3.4 pp. of GDP until 2060 creating
substantial fiscal gaps
• Therefore, for many the adjustment passes by looking at the
structural component health/long-term care in addition to pensions or
education
• Question of affordability: the level of spending depends on
preferences but also whether

6. Fiscal sustainability indicators
(tax-gap indicators)
• S1: Required PB adjustment to reach 60 %
debt ratio in 2030
• S2: Required PB adjustment to keep debt
bounded over an infinite horizon
(intertemporal budget constraint of
general government)
6

7. 7
Decomposing the S1 and S2 indicators:
sustainability gap indicators depend on
- the short-term fiscal conditions (IBP and debt level); and,
- the long-term budgetary developments (CoA)
=2S
Required PB adjustment given
the initial budgetary position
(IBP)
Required adjustment to
reach debt to GDP ratio
of 60% in 2060 (DR)
Required adjustment due
to the cost of ageing
(CoA)
S1= Gap to the debt-stabilising
primary balance
+ Additional adjustment
until 2020 required to
reach a debt target of
60% of GDP in 2030
+ Additional adjustment
required to finance the
increase in public
expenditure due to
ageing up to 2030
S2= Gap to the debt-stabilising
primary balance
+ 0 + Additional adjustment
required to finance the
increase in public
expenditure due to
ageing over an infinite
horizon

8. Structural primary
balance, 2014 and
average 1998-2012
- IT, PL, HU, MT, SK, RO,
LV more than 2 pp. of
GDP above the long-term
average in 2014
- Fiscal tightening of 3
3/4 pp. of GDP between
2011 and 2014 in IT and
ES
- BE, DK, FI more than 2
pp. of GDP below the
long-term average in
2014
8
-04 -03 -02 -01 00 01 02 03 04 05 06
SK
CZ
MT
PL
LT
LV
SI
RO
UK
FR
HU
EE
CY
ES
EU
AT
DE
NL
LU
BG
IT
SE
BE
DK
FI
Structural primary balance
(2014)
Structural primary balance
(average 1998-2012)

9. Bulk of health care spending at older ages
9
0%
5%
10%
15%
20%
25%
0
4
8
12
16
20
24
28
32
36
40
44
48
52
56
60
64
68
72
76
80
84
88
92
96
100
Age by year
% GDP per capita
EU15 - M
EU15 - F
EU12 - M
EU12 - F

10. (Healthy) life expectancy in the EU – 2010 and 2060
10
Graph: Healthy life expectancy
in the EU – 2010/2060
Graph: Number of dependent
people in the EU – 2010/2060,
in millions

11. Gross debt as % of GDP and cost of ageing, AWG baseline and risk scenarios
Cost of ageing – expected increase in health and long-term
care public expenditure is a major challenge
11

12. FSR2012 : Medium term challenges (S1)
• 3 Components: CoA=cost of ageing DR= Debt ratio IBP= Initial Budgetary position
12
EU: 1.8% of GDP

13. FSR2012 : Long term challenges (S2)
• Long-term challenges influenced by population ageing
remain important in most countries (S2 indicator)
13
EU: 2.6% of GDP

14. -2.3
-0.7
0.5
1.2
1.4 1.5 1.6 1.7
2.1
2.6 2.6 2.8
3.7
4.1
4.7 4.8
5.2
5.5
5.8 5.8 5.9
6.9
7.4
7.6
8.2
9.7
-6
-4
-2
0
2
4
6
8
10
12
IT LV HU EE DE PL FR SE EA DK EU27 BG RO AT LT ES UK CZ FI MT NL SK BE SI CY LU
Sustainability indicator (S2)
CoA - Others CoA - HC&LTC CoA - Pensions IBP S2
FSR2012 : Long term challenges (S2)
• Differences in composition of the long-term challenges
14
EU: 2.6% of GDP

15. Flagging of sustainability challenge
on basis of S1 and S2
When do we conclude that there is a challenge in the field of health
or long-term care?
1. Medium term high or medium risk: S1 > 0 and health care or
long-term care contributes significantly to that risk (above the
(equally-weighted) average); or
2. Long term high or medium risk: S2 > 2 and and health care or
long-term care contributes significantly to that risk (above the
(equally-weighted) average).
15

16. 16
Structural fiscal reforms: indicators
Notes:
Yellow = CSR not
recommended by
FS TAF;
Orange = No CSR,
although
recommended by
FS TAF
Health care
Long-term
care
Health care
Long-term
care
Health care
Long-term
care
BE 5.4 0.1 0.3 7.2 0.3 1.9 X BE
BG -1.2 0.2 0.0 3.4 0.4 0.2 X BG
CZ 0.6 0.3 0.1 5.3 1.1 0.4 X CZ
DK -2.1 0.3 0.5 2.2 0.7 2.6 DK
DE 0.1 0.4 0.1 2.1 0.9 0.1 X X DE
EE -2.8 0.2 0.0 1.9 0.7 0.2 EE
IE 5.2 0.3 0.1 3.2 1.1 1.2 X IE
ES 0.2 0.2 0.0 0.3 1.2 0.4 X ES
FR 2.6 0.3 0.0 1.6 1.0 -0.1 X FR
HR 2.2 0.3 -0.1 2.2 2.2 0.0 X HR
IT 1.5 0.2 0.1 -1.6 0.6 0.6 IT
LV -2.4 0.1 0.0 -0.1 0.4 0.2 X LV
LT -1.0 0.1 0.1 4.3 0.4 0.7 LT
LU 0.4 0.1 0.2 10.2 0.7 1.5 X LU
HU -0.8 0.2 0.1 0.6 0.7 0.3 HU
MT 1.6 0.6 0.2 6.2 1.9 0.6 X MT
NL 1.2 0.4 0.5 5.3 0.7 2.7 X NL
AT 1.7 0.4 0.2 3.5 1.1 0.8 X X AT
PL 0.2 0.4 0.1 2.5 1.5 0.6 X PL
PT 2.6 0.3 0.0 -0.8 1.3 0.2 X PT
RO -0.5 0.2 0.1 4.5 0.7 0.6 X RO
SI 1.9 0.3 0.2 6.6 0.8 1.1 X X SI
SK -0.1 0.5 0.0 4.3 2.0 0.2 X SK
FI 2.1 0.3 0.5 6.0 0.7 1.9 X FI
SE -1.6 0.2 0.4 3.4 0.5 2.0 SE
UK 4.3 0.2 0.1 4.9 0.8 0.5 UK
hresho 0.0 0.3 0.1 2.0 0.9 0.8
Actual CSR 2014Sustainability
indicator
(S1)
2016-2030, of which:
Sustainability
indicator (S2)
2016-2060, of which:

17. Upside and downside risks
 Initial budgetary position
• What is the structural balance in 2014?
• Will countries be able to keep the high level of SPB for
a long period?
 Medium- to long-term impact of the crisis on
potential growth and interest rates
• This is not cycle as usual
 Are long-term expenditure trends underestimated?
• Very large uncertainty in relation to health care (non-
demographic drivers?)
 Demography-related risks
• Are we underestimating gains in longevity?
• Are we underestimating migration flows? 17

18. What's next ?
18
• CRs in end February, with
IDR and debt analysis
• CSRs in May
• Ageing Report 2015 in May
• Fiscal Sustainability Report in
end 2015

19. Council conclusions on the FSR 2012 (12/2/2013)
• WELCOMES the work of the Commission on the multidimensional
approach for assessing fiscal sustainability, based on short-, medium-
and long-term challenges developed in the Commission "Fiscal
Sustainability Report 2012";
• UNDERLINES the need to return to sustainable positions through
determined action to improve fiscal positions further in a
continuous and steadfast manner in line with the Stability and Growth
Pact;
• UNDERLINES that comprehensive and adequate reforms, notably of
pension, health care and long-term care systems, can have a
substantial positive impact on long-term fiscal Sustainability;
• [REAFFIRMS] Ensuring the sustainability of public finances is a
challenge which should be reflected in economic policy
coordination in the EU.

20. The Fiscal Sustainability Report 2012
can be found on DG ECFINs website:
• http://ec.europa.eu/economy_finance/publications/european_economy/2012/fiscal-
sustainability-report_en.htm
Thank you for your attention!
The Statistical Annex of the FSR 2012 - with
country-specific informaton - can be found
on ECFIN C2s internal web-site

21. Extra slides

22. Fiscal Sustainability Report 2012:
thresholds for assessing degree of risk
S0 indicator
Countries with a value for the overall composite indicator above the threshold (0.44)
in 2012 are at risk for fiscal stress in the year ahead.
The S1 indicator
The following thresholds were used to assess the scale of risk for 'debt compliance':
(i) if the S1 value is less than zero, the country is assigned low risk;
(ii) if it is between 0 and 3 (thus requiring a structural adjustment in the primary
balance of up to 0.5 p.p. of GDP per year – the benchmark adjustment in the SGP -
until 2020), it is assigned medium risk; and,
(iii) if it is greater than 3 (meaning a structural adjustment of more than 0.5 p.p. of GDP
per year is necessary), it is assigned high risk.
The S2 indicator
As was the case in the 2009 Sustainability Report, the following thresholds for the S2
indicator were retained:
(i) if the value of S2 is lower than 2, the country is assigned low risk;
(ii) if it is between 2 and 6, it is assigned medium risk; and,
(iii) if it is greater than 6, it is assigned high risk.

23. Assessing the medium- and long-term
sustainability of public finances
23
Initial Level
- Level of Debt
- Structural Primary
Balance
Sustainability
Indicators
Projected
development
- S1
- Structural Primary
balance
- S2
- Property Income
Age-related
Expenditure
- Pensions
- Health Care
- Long-term Care
- Education
- Unemployment
Macroeconomic
Variables
- Real Interest Rate
- Potential GDP
Growth
EUROSTATDemographicProjection
CommissionForecastAgeingReport
Required Adjustment
Given the Initial
Budgetary Position
Required Adjustment
Given the Cost of
Ageing
Required Adjustment
Given the Debt
Requirement

24. Fiscal Sustainability Report 2012
Relevance: fiscal sustainability an acute policy challenge, due to :
• deterioration in fiscal positions
• increases in government debt since 2008,
• projected costs of demographic transition (ageing)
Multidimensional approach employed, making it possible to
assess:
• short-term challenges (‘risk for fiscal stress’);
• medium-term challenges (‘debt compliance risk’);
• long-term challenges (‘ageing-induced fiscal risks’).
24