Public Finances
An expert’s view
Ricardo Reis, professor and economist at London School of Economics, was the peer review of this study and comments the main results.
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Public Finances
Sustainable public finances matter for intergenerational fairness. If they are not sustainable, households in the future will be required to pay more taxes, receive lower benefits or enjoy less public goods and services.
We conducted a study with the aim of answering the following questions:
What is the contribution of the various generations for the State budget and for the public debt? What charges will we leave to future generations?
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Benefits
Taxes
More benefits than taxes
More taxes than benefits
Taxes payments and benefits received (health, education, pension, etc.) vary a lot over the life cycle.
Working-age population pay more taxes than what they receive in social benefits. The opposite happens during youth and retirement.
Between 1995-2017 tax payments and benefits received in the different life stages changed from generation to generation.
During childhood, between 0 and 10 years, the most recent generations continuously received lower benefits. In contrast, during retirement, between 70 and 80 years, the increase in benefits was higher than the increase in tax payments in the most recent generations.
In 2100, the biggest part of population will be concentrated between 60 and 85 years.
The rise of the average lifespan and the low fertility rate are leading to a demographic ageing and to a profound change of its age distribution.
The demographic dynamics estimated for the next decades is incompatible with the existing profile of benefits and taxes associated with each age group.
Without taking any measures, the 2017 budget surplus will turn into a permanent deficit as of 2030, leading to an unsustainable public debt.
0%
0%
Tax
increase
increase
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0%
Benefits
reduction
reduction
Adjustment on current and future generations
Adjustment only on future generations
To ensure the long-term sustainable public finances, it will be necessary to reduce now, and permanently, the public expenditure in 19% or to increase the tax burden in 22%.*
The later we act, the worse. If nothing is done, the necessary adjustment will be bigger and fairness between generations can be at stake.
*If the ratio between taxes and benefits paid/received by the younger and paid/received by the older remained similar to 2017
It will be necessary to make choices and to calculate the impact of the eventual changes in public policies on the present and future generations.
Study directed by Francesco Franco (NOVA SBE), Tiago Bernardino (Stockholm University) and Luís Teles Morais (NOVA SBE and IPP).
We challenged universities to present and discuss solutions to solve the sustainability of public finances and the reversal of the demographic decline. This challenge resulted in two proposals, developed by Instituto Superior de Economia e Gestão da Universidade de Lisboa (ISEG) and by CATÓLICA-LISBON’s Business and Economics Research Unit.