Ageing Costs ‘Threaten Second Fiscal Crisis’

While a successful resolution of the current fiscal crisis – both in the US and in Europe – remains the most important driver for many advanced-economy ratings, without further reform to address the impact of long-term ageing these western economies face a second, longer-term fiscal shock, according to Fitch Ratings.

In its report, entitled
‘Ageing Costs: The Second Fiscal Crisis’
, the credit ratings agency (CRA) warns that without the implementation of mitigating reforms the median country analysed is projected to see its budget worsen by 0.6% of gross domestic product (GDP) by 2020, and 4.9% of GDP by 2050.

Consequently, many of these developed countries would experience escalating government debt-to-GDP ratios, with the average EU27 debt-to-GDP projected by Fitch to rise by 6.9% by 2020 and 119.4% by 2050. Without reforms to boost labour productivity and/or participation rates in many other advanced economies, population ageing will cause potential GDP growth to decline over the long-term, exacerbating the fiscal challenge. Many treasurers are already looking at risk in a different way due to these fiscal challenges.

Few countries face an imminent problem. However, without major pension reforms Fitch would expect to take negative rating actions over the next decade on the countries facing the most pressing ageing pressures.

For illustration, under a no policy response scenario, Fitch’s sovereign rating model (SRM) predicts a 1.5-notch downgrade by 2030 for countries with the worst ageing problem, and a five-notch downgrade for them by 2050. According to the model, Japan, Ireland and Cyprus face the largest jump in ageing costs over the next decade, while Luxembourg, Belgium, Malta and Slovenia face the most severe impact over the very long term. In particular, the setback to pension reform was a key contributory factor to the downgrade of Slovenia’s ratings in 2011.

Despite the fiscal challenge currently facing some periphery eurozone countries, their recent experience also shows the power of reforms in transforming long-term projections. Recent reforms in Portugal, Italy and Greece have effectively neutralised the long-term impact of ageing on public finances in those countries.

Fitch’s report focuses mainly on EU and Organisation for Economic Co-operation and Development (OECD) countries which face the most severe ageing populations and related fiscal costs. It also presents some data and preliminary analysis of the challenge facing emerging markets, for which data is generally less readily available.


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