Generational accounting in Belgium: fiscal sustainability at a glance

Decoster, A., Flawinne X. and Vanleenhove, P. (2011), Generational accounting in Belgium: fiscal sustainability at a glance, Flemosi Discussion Paper 9.

This paper uses generational accounts as an instrument to analyse the fiscal long term sustainability of Belgian public finances. Age-profiles of detailed tax and expenditure categories are derived from microdata and microsimulation models, and then plugged into a long run demographic projection. We assess fiscal sustainability under current fiscal and budgetary policy for the baseyear 2010, and perform simulations of counterfactuals to determine the most important factors of the long run unsustainability.
The generational accounting exercise shows that the budgetary situation in Belgium is untenable in the long run. However, contrary to what is often put forward in public debates, the current level of explicit debt plays only a minor role in explaining this sustainability problem. The ageing of the population and the related increase in age related expenditures are the main drivers of the long run fiscal imbalance and the high implicit debt. We analyse the generational effects of different tax instruments and expenditure reductions to return to sustainability and further disentangle the generational accounts for the three regions separately. Although the fiscal imbalance is biggest in Wallonia due to lower participation rates and higher unemployment, the projected demographic evolution, and more specifically the ageing of the population, has higher budgetary repercussions in Flanders.