Throughout the developed world, economies are experiencing two important trends. First, spending by governments is evolving away from the general (e.g., national defense, roads, etc.) and toward the agespecific, particularly social insurance transfer programs targeted to the elderly. Second, the combination of low birth rates and increasing longevity is inducing a marked change in the population age structure, with rapid increases in the old-age dependency ratio. Together, these trends are predicted to lead to very sharp increases in the share of GDP absorbed by government spending sometime in the next few decades, although the timing and magnitude may be expected to differ across countries.

These projections pose several interesting challenges to traditional approaches to the evaluation of fiscal policy. First, they suggest that short-run measures of fiscal balance, most notably the government budget deficit, are grossly inadequate for characterizing the true state of fiscal policy. In particular, this year's U.S. budget does not reflect the very large imbalances implicit in unfunded social insurance commitments. The same is true in Europe, the recent success in meeting the Maastricht debt targets notwithstanding. This helps explain why, in spite of current budget indicators, the United States is confronting the prospect of social security privatization and changes in the Medicare system, and why some European countries are beginning to experience labor strife as they attempt to reduce the generosity of government programs.