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October 19, 2010

In Their Own Words: The Cost of Entitlements

"The bond market is pricing in the impact of someone with a printing press being a buyer. We did really well in winning the war against world depression but we're having problems securing the peace."

Editorial comment: Could the short term success above been achieved by mortgaging long-term stability?

"By the middle of the century, about 1 billion over 65s will join the ranks of
those classed as of non-working age. Standard & Poor's Ratings Services believes that the cost of caring for these people will profoundly affect growth prospects and dominate public finance policy debates worldwide."

A typical country's deficits may rise from 4.5% (advanced sovereigns median, 4.7% of GDP; emerging market
sovereigns median, 4.5%) of GDP to more than 6% (7.5%; 3.1%) of GDP by the mid-2020s, assuming no policy

· The interest cost of the growing debt burden may exacerbate the budgetary impact of demographic spending
pressure, and deficits will rise inexorably to almost 8.5% (9.7%; 4.6%) of GDP in 2030 and to 19% (24.5%;
11.7%) by the middle of the century.

· While the median general government net debt burden may increase to 50% (78%; 36%) of GDP through to
2020, its growth is likely to accelerate thereafter. By 2030, the net debt burden is projected to be at almost 90%
of GDP (112%; 60%), and will be on explosive path to above 260% (329%; 126%) of GDP by 2050.

· As a result, the economic size of the state may increase significantly. Government spending may rise to 60%
(66%; 45.7%) of GDP in 2050, from 44% (45.8%; 37.3%) today.

The challenges ahead are daunting for the vast majority of sovereigns covered in this survey, particularly in cases
where market pressures are pushing policy makers to embrace budgetary consolidation simultaneously with
structural reforms of pension and health-care systems. For some sovereigns, this may put the relationship between
the state and electorate under strain and severely test social cohesion.

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