Appendix G
International Experience with Long-Term Budgeting1

Long-term fiscal projections provide a basis for assessing the sustainability of current public policies over an extended period (10 years or more) using select summary fiscal indicators.2 They do so by modeling future government expenditures and revenues on the basis of explicit demographic, macroeconomic, microeconomic, and other assumptions.

RECENT INTERNATIONAL PRACTICE

Over the past decade, fiscal projections have become increasingly common in the countries of the Organisation for Economic Co-operation and Development (OECD). In the mid-1990s, projections were prepared in only two countries, New Zealand and the United States; in 2009, 19 countries report that they prepare them; see Table G-1. The time horizon of fiscal projections varies among countries, from 25 years in Korea to approximately 100 years in the Netherlands. The majority of these countries prepare fiscal projections on an annual basis, while six countries prepare them on a regular periodic basis (every 3 to 5 years), and two prepare them on an ad hoc basis. In parallel with these developments, attention to fiscal projections and fiscal sustainability has become more prominent in the monitoring and surveillance work of international organizations, including the European Commission, the International Monetary Fund, and the OECD.

This appendix focuses on the experiences of 12 OECD and other industrialized countries in using fiscal projections: Australia, Canada, Denmark, Germany, Korea, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States. For the most part,



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Appendix G International Experience with Long-Term Budgeting1 Long-term fiscal projections provide a basis for assessing the sustain- ability of current public policies over an extended period (10 years or more) using select summary fiscal indicators.2 They do so by modeling future gov- ernment expenditures and revenues on the basis of explicit demographic, macroeconomic, microeconomic, and other assumptions. RECENT INTERNATIONAL PRACTICE Over the past decade, fiscal projections have become increasingly com- mon in the countries of the Organisation for Economic Co-operation and Development (OECD). In the mid-1990s, projections were prepared in only two countries, New Zealand and the United States; in 2009, 19 countries report that they prepare them; see Table G-1. The time horizon of fiscal pro- jections varies among countries, from 25 years in Korea to approximately 100 years in the Netherlands. The majority of these countries prepare fis- cal projections on an annual basis, while six countries prepare them on a regular periodic basis (every 3 to 5 years), and two prepare them on an ad hoc basis. In parallel with these developments, attention to fiscal projections and fiscal sustainability has become more prominent in the monitoring and surveillance work of international organizations, including the European Commission, the International Monetary Fund, and the OECD. This appendix focuses on the experiences of 12 OECD and other in- dustrialized countries in using fiscal projections: Australia, Canada, Den- mark, Germany, Korea, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States. For the most part, 

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 APPENDIX G TABLE G-1 Fiscal Projections in OECD Countriesa Frequency fiscal How many years do fiscal projections cover? projections are prepared? 21–30 31–40 41–50 51–60 61+ Total Annually Belgium, Finland, Czech Denmark, 11 France,* Hungary, Republic* United Poland, Portugal, States Sweden,* United Kingdom* Regularly (every Australia, Germany,* 5 3-5years) New Ireland, Zealand Switzerland Koreab Japan,c Norway Ad hoc basis Netherlands 4 Total 1 2 13 1 3 aAustria, Canada, Greece, Iceland, Mexico, and Turkey responded that they did not prepare fiscal projections of 10 years or more. Austria, Belgium, France, Ireland, Slovak Republic, and Spain responded that they prepare fiscal projections primarily for European Commission Stability and Convergence reporting. bKorea: Vision 2030 was prepared in 2030 and included projection of expenditures to meet the government’s proposed policy goals. cJapan: fiscal projections were prepared in 2007 by the Council on Economic and Fiscal Policy until 2025 and the Financial Systems Council within the Ministry of Finance until 2050. *Countries also present fiscal projections over an infinite time horizon. SOURCE: Anderson and Shepherd (2010). these countries were selected on the basis of their responses to the 2007 OECD Budget Practices and Procedures Survey, particularly the question on the frequency of their projections and the length of time covered. Countries integrate projections with other budget practices and proce- dures in various ways. Examples include the use of long-term projections when evaluating existing and new government initiatives, such as entitle- ment spending, and linking the analysis of projections through budget triggers. Budget triggers are a signal for budget restraint based on indica- tor of solvency (e.g., actuarial projections) or a sustainability factor (e.g,. dependency ratio). Triggers may be hard or soft. Hard triggers usually involve automatic cuts to program spending, changes in eligibility criteria or benefit formulas of mandatory spending, or tax increases. Soft triggers often involve result in further proposals to change the path of fiscal policy but are not guaranteed to produce changes (Government Accountability Office, 2008). An overview of the fiscal futures reports from the 12 countries surveyed is presented in Table G-2.

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TABLE G-2 Overview of Fiscal Futures Reports Responsibility for First/Most Most Formal Reporting Preparation and Recent Level of Recent Time Frequency Country Obligations Most Recent Report Title Release Release Analysis Horizon Produced Australia Charter of Budget Intergenerational Report 2 Department of 2002 / Central 40 years Every Honesty (1998) Treasury 2007 government 5 years Canada NA Working Papers Department of 2000 / General 40 years Ad hoc Finance 2002 government Denmark EC Convergence Convergence Reports Ministry of Finance 1997 / General Until 2050 Every Program 2008 government (fixed)a 5 years Germany EC Stability Report on the Sustainability Federal Finance 2005 / General Until 2050 Every Program of Public Finance Administration 2008 government (fixed)a 4 years Korea NA Vision 2030 Ministry of Planning 2006 / Central 25 years Ad hoc and Budgetb 2006 government Netherlands EC Stability Aging and the Sustainability Central Planning 2000 / General Until 2100c Ad hoc Program of Dutch Public Finances Bureau 2006 government New Public Finance Act New Zealand’s Long-term New Zealand 1993 / Central 40 years Every Zealand (1989 as amended)d Fiscal Position Treasury 2006e government 4 years Norway NA Long-term Perspective for the Ministry of Finance 2006 / General 50 years Annually Norwegian Economy 2009f government Sweden EC Convergence Sweden’s Economy (Budget Ministry of Finance 1999 / General Until 2050 Annually Program Bill) 2008 government (fixed)a Switzerland NA Long-term Sustainability of Federal Department 2008 / General 50 years Every Public Finances in Switzerland of Finance 2008 government 4 years United Code of Fiscal Long-term Public Finance H.M. Treasury 1999 / General 50 yearsa Annually Kingdom Stability (1998) Report 2008 government 

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TABLE G-2 Continued  Responsibility for First/Most Most Formal Reporting Preparation and Recent Level of Recent Time Frequency Country Obligations Most Recent Report Title Release Release Analysis Horizon Produced United States NA Analytical Perspectives (Long- OMB 1997 / Central 75 years Annually run budget outlook) 2008g government United States NA Long-term Budget Outlook CBO 1991 / Central 75 years Every 2007 government 2 years United States NA Long-term Fiscal Outlook GAO 1992 / Central 75 years 3 times / 2008 government year NOTE: NA = not applicable. aDenmark, Germany, Norway, Sweden, and UK: fiscal projections also prepared for an infinite time period. bKorea: Ministry of Planning and Budget was merged into the Ministry of Strategy and Finance in 2007. cNetherlands: time horizon spans until 2100 though report also separately discusses policies until 2040. dNew Zealand: legal obligations were first required under the Fiscal Responsibility Act, 1994, and subsequently integrated into the Public Finance Act, 1989, as amended in 2004. eNew Zealand: in 1993 and 1996 as pre-election report spanning approximately 50 years; since 2000 integrated in budget for 10 years; since 2006 as a standalone report for 40 years. fNorway: since 1954 the Cabinet’s “Long-term Programme” showed the Cabinet’s policies for the next 4 years. These are considered medium-term budget estimates in this report. gUnited States: 5-year budget projections prepared during the 1970s and 1980s were labeled “long-term” projections. These are considered me- dium-term budget estimates in this report. SOURCE: Anderson and Shepherd (2010).

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 PROJECTIONS OF SPECIFIC FUNDS Many countries also make long-term projections of specific budgetary funds, such as a public pensions and social security. A specific budgetary fund may be managed as a separate independent legal entity responsible for assets and contributions for an exclusive purpose. For example, fiscal projections of pension funds are undertaken in a number of OECD coun- tries; see Box G-1. SUMMARy OF EXPERIENCE WITH FISCAL PROJECTIONS The experiences of the 12 countries considered can be summarized as follows: • Most countries surveyed publish fiscal projections to assess the government’s fiscal future over a 40-50 year time horizon, and around half also over an infinite time horizon. Only half of all countries prepare their analyses annually. The practice remains relatively new in most countries, introduced in the past decade. • Although many factors, such as the fiscal consequences of popula- tion aging, global climate change, and contingent liabilities pose risks to fiscal sustainability, most projections focus solely on popu- lation aging. • A combination of projected fiscal aggregates and synthetic indica- tors are the most common measures of fiscal sustainability; gen- erational accounting is prepared only in a couple of the countries surveyed. Few countries provide an assessment of how and why their fiscal futures have changed since the last projection. • Although sensitivity analyses of demographic and macroeconomic assumptions are common in many country’s fiscal projections, sensitivity analysis of the microeconomic assumptions relating to the cost of government services is not common. Analysis is typi- cally used to assess a country’s fiscal future rather than to highlight policy options. • Although the methodology and assumptions underlying fiscal pro- jections are disclosed in many reports, none clearly presents how assumptions have changed over time and the reasons underlying the changes.

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 APPENDIX G BOX G-1 Actuarial Projections of Pensions or Social Security Funds in Australia, Canada, Japan, Korea, the United Kingdom, and the United States The Australian Government Actuary, located within the Australian Treasury, prepares actuarial cost estimates of the Public Sector Superannuation Scheme (PSSS) and the Commonwealth Superannuation Scheme (CSS) every 3 years, most recently in 2006. The report identifies the projected actual Australian Gov- ernment employer costs; the size of the Australian government’s unfunded su- perannuation liability; and the level of the notional employer contribution rates required to cover the costs of the schemes. Canada’s Office of the Chief Actuary, located in the Superintendent of Financial Institutions Canada, undertakes a review of the Canada Pension Plan as required by legislation. To date, 23 actuarial reports have been prepared since 1964, though their frequency and time horizons have varied over this period. Since 1997, actuarial projections have been standardized to cover a 75-year period and to be published every 3 years. Japan’s Chief Actuary of the Ministry of Welfare conducts a mandatory review of the financial status of the public pension system at least once every five years as required in legislation, most recently in February 2009. The reports update the underlying modeling assumptions and checks whether the replacement rate is on track to fall below its prescribed minimum level in the future. In Korea, an assessment of sustainability of the Korean National Pension Scheme is required by legislation every 5 years. The introduction of actuarial projections as of 2003 represents one of the major changes in the 1998 amendment to the National Pension Act. To date, two actuarial projections have been prepared: the first in 2003, the second in 2008. The United Kingdom Government Actuary’s Department prepares reviews every 5 years of the National Insurance Fund. The reviews provide a 60-year projection to estimate the contribution rates required to be paid to the National Insurance Fund in future years in order to meet expenditure on a pay-as-you-go basis. Projections, however, may be updated more frequently as necessary to il- lustrate the financial consequences of reform proposals and new draft legislation. An external peer review of the department’s projections is conducted periodically, most recently in 2002. In the United States, the Social Security Act was amended in 1968 to provide for the appointment of an advisory council every 4 years beginning in 1969. The council was to review the status of the Social Security and Medicare trust funds as well as the scope of coverage and adequacy of benefits under the Social Se- curity and Medicare programs. The statute specifically authorized the council to engage the technical assistance necessary to carry out their functions. A technical advisory panel also reviews the methods and assumptions used in the annual projections for the Social Security trust funds.

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 APPENDIX G NOTES 1. This appendix is drawn from a survey of international experience with long-term projec- tions, analysis, and related practices conducted for the committee by Barry Anderson, head of the budgeting and public expenditures division, public governance and territo- rial development division, Organisation for Economic Co-operation and Development (OECD), with the support of his colleague James Sheppard. A full report on that survey was presented at the June 2009 meeting of OECD senior budget officials and has now been published; see Anderson and Sheppard (2009). 2. What constitutes “long term” is subject to much discussion. Logically, the long term is anything beyond the medium term, which itself varies between countries. Long term is typically associated with effects across generations. In industrialized countries, an average generation is 30-40 years. The time period of more than 10 years has been selected here, noting that a number of countries prepare medium-term fiscal frameworks spanning up to 8 years (e.g., Denmark and Sweden). REFERENCES Anderson, B., and Sheppard, J. (2010). Fiscal futures, institutional budget reforms, and their effects: What can be learned? OECD Journal on Budgeting, 00(3). Government Accountability Office. (2006). Budget Process: Better Transparency, Controls, Triggers, and Default Mechanisms Would Help to Address Our Large and Growing Long-term Fiscal Challenge. GAO-06-761T, May 25. Washington, DC: U.S. Government Accountability Office.

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