Introduction

In most Member States of the European Union (EU), the achievement of sound and sustainable finances is high on the political agenda. Evergrowing debt burdens are inducing rising interest payments that force public decision makers to choose between economizing on other spending items and increasing already high tax loads, and with them their negative incentive effects. Throughout the EU, there is also a clear and present need to reform the welfare state, since population aging, rising unemployment rates, and lack of competitiveness in an integrated world economy are imposing more and more constraints on generous welfare programs.

This chapter investigates the demographic transition and its impact on the intergenerational effects of fiscal policy within the European Union. Traditional fiscal indicators based on cash-flow budgets fail to address the long-run effects of today's fiscal policy. Future liabilities of unfunded social security and health care systems are absent from current annual statistics, making the amount of outstanding public debt an unreliable indicator for assessing fiscal policy issues. Hence, we use the device of generational accounting developed by Alan Auerbach, Jagadeesh Gokhale, and Laurence Kotlikoff (hereafter AGK) in order to investigate the effects of current fiscal policy on living and future European generations.

The intergenerational analysis provided in this chapter is restricted to twelve of the fifteen Member States of the EU: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Spain, Sweden, and the United Kingdom.