Governments are facing a fiscal time bomb related to funding pensions and healthcare as populations age – one that will “dwarf” the costs associated with the current Covid crisis, the Organisation for Economic Co-operation and Development (OECD) has warned.
The Paris-based think tank said a deceleration in large emerging economies, demographic change and slowing productivity would drag trend economic growth among the OECD's 38 members, including Ireland and the G20 nations, from 3 per cent currently to 1.5 per cent by 2060.
Secular trends such as population ageing and the rising relative price of services would place significant long-term strain on public finances, it said.
To maintain public services and benefits while stabilising debt in that environment, governments would have to raise revenues by nearly 8 per cent of gross domestic product, the OECD said.
In some countries, including France and Japan, the size of the challenge would amount to more than 10 per cent of output. And this does not take account of expenditures related to climate change.
The report comes as Ireland’s national debt approaches €240 billion and as the Government ’s Commission on Taxation considers various ways to fund increased demands on the public purse from an ageing population and the shift to a low-carbon economy.
Most OECD countries could finance some of the projected increases in expenditure with additional government debt and still keep net interest payments as a share of GDP within historical norms, the OECD said.
“This strategy could delay, but not avoid, the need for fiscal consolidation if public debt ratios are to be kept from rising to levels that could impede governments’ ability to stabilise economic fluctuations and make needed public investments,” it said.
The OECD’s report suggests countries need not necessarily raise taxes to meet these future demographic challenges. Instead, it calls for reforms to boost employment rates and raise retirement ages.
“Policy scenarios show that reforms to labour market and retirement policies could help boost living standards and alleviate future fiscal pressures,” the OECD said.
“An ambitious reform package combining labour market reforms to raise employment rates with reforms to eliminate early retirement pathways and keep effective retirement ages rising by two-thirds of future gains in life expectancy could halve the projected increase in fiscal pressure in the median country, even after taking into account future spending pressures associated with ageing,” it said. – Additional reporting by Bloomberg