The long-term sustainability of public finance in Germany: an analysis based on generational accounting

This paper analyses the sustainability of German public finance between 1996 and 2000 using a generational accounting approach. In contrast to previous studies based on generational accounting, the results are adjusted for cyclical and other temporary effects. This reduces the impact of exceptional factors obtaining in the base year and enhances the comparability of the results over time. First, a "status quo scenario" is considered as a comparatively transparent basis for assessing fiscal policy in the base year. In this setting it is assumed that the fiscal conditions obtaining in the base year will prevail in future years, too. Second, to obtain a more realistic picture of the real need for further fiscal policy action, a "policy scenario" is developed which includes already agreed measures that will take (full) effect only in the future. It is argued that, despite a substantial improvement in public finance in the second half of the 1990s, a sizeable sustainability gap persisted in 2000 under both scenarios. This is mainly due to the unfavourable demographic development, the consequences of which for government budgets are only partly compensated by the assumed catching-up of eastern Germany. In each of the years considered, already agreed measures taking effect in the future improved the sustainability of public finance on balance. Thus in each year the sustainability gap was narrower under the policy scenario than under the status-quo scenario.