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Maplecroft's Fiscal Risk Index 2011

According to a new ranking of 163 countries, Europe’s big economies, including France, Germany, Italy, Sweden and the United Kingdom, are the most exposed to fiscal risk due to their ageing populations, substantial levels of debt and high public spending on health and pensions.

The Fiscal Risk Index, developed by risk analysis and mapping firm, Maplecroft, identifies countries that will come under increasing economic pressure in future years due to low birth rates, high life expectancy and state commitments to look after ageing populations.

The index is calculated using eight indicators: child and old-age dependency ratios between 2010 and 2050; labour rates of the over-65s; GDP; debt; and public spending on pensions, health and education.

Europe is home to 11 out of the twelve countries rated ‘extreme risk.’ These include: Italy (1), Belgium (2), France (3), Sweden (4), Germany (5), Hungary (6), Denmark (7), Austria (8), United Kingdom (10), Finland(11) and Greece (12). Japan (9) is the only other country in the highest risk category.

The ‘extreme risk’ countries are characterised by increasingly ageing populations and high public spending on social security. Maplecroft states that high life expectancy will place more pressure on public expenditure because pensions will need to be paid to more people for longer and an older populace will place larger burdens on health systems. At the same time, the working-age population in these countries is shrinking; meaning contributions to public pensions will likely decrease.

In the UK, there are currently 25 old people for every 100 of working age (25%). This is forecast to rise to 38% by 2050. Whilst high, the UK projection pales against other ‘extreme risk’ countries, including: France 47%, Germany 59%, Italy 62% and Japan at the very top with 74%.

In a report from June 2009, the IMF suggested that the fiscal implications of ageing populations could dwarf the impact of the recent financial crisis in terms of national accounts. It estimates that the net present value of the financial crisis is about 11% of what ageing related spending will cost.

Fiscal Risk Index 2011

Maplecroft's Fiscal Risk Index 2011
Extreme risk
High risk
Medium risk
Low risk
No Data
Rank Country Rating
1 Italy Extreme
2 Belgium Extreme
3 France Extreme
4 Sweden Extreme
5 Germany Extreme
Rank Country Rating
6 Hungary Extreme
7 Denmark Extreme
8 Austria Extreme
9 Japan Extreme
10 United Kingdom Extreme

“Fiscal sustainability is commonly seen as being the government’s responsibility to prudently manage public income and expenditure, ensuring it can honour future payments,” said Maplecroft Analyst, Siobhan Tuohy.  “However, in high risk countries, it is increasingly likely that the private sector will be called upon to contribute in the form of pensions and private healthcare. This could prove vital in preserving productivity in an ageing workforce and reducing government liabilities in the future.”

Without significant adjustments, such as raising taxes or reducing spending, countries risk going bankrupt. One such adjustment has already been seen in the UK and Germany where recent government initiatives have increased the state pension age to encourage people to work for longer as a way to alleviate pressure on public finances.

Europe, however, has the lowest proportion of economically active people aged 65 and over. The labour market participation of all those aged 65+ amongst the ‘extreme risk’ nations range from 1.4% in France to 11.7% in Sweden, with the UK at 7.71%. This is compared to a 28% average across all countries in the Index. The main reasons for low participation are financial incentives, such as pensions, pulling people from the workforce and push factors, such as discrimination, which restrict job opportunities.

Professor Alyson Warhurst, CEO of Maplecroft, states: “Governments in high risk countries may need to rely on business to helpthem absorb the costs. At the very least, governments will need the private sector to recruit and retain older workers and provide for more generous pension arrangements.”

The demographic situation in most of the highest risk countries is accentuated further by their exposure to the global recession, which has left government balance sheets deep in the red. This is seen most prominently in Japan, which faces huge challenges due to an average general government gross debt between 2006 and 2010 of 203% of GDP; the highest out of the 12 extreme risk countries. On 27 January 2011, Standard & Poor's downgraded Japan’s credit rating by one notch to AA-, its fourth-highest rating in response to concerns the country's high deficit and fast-ageing population.

Central government debt is also an issue for UK. General government debt over the last 5 years has averaged 57% of GDP. However, it has been increasing steadily from 43% in 2006 to 77% in 2010. This means additional pressures on public finances from an ageing population could have a more profound impact and sooner.

Data sources used to calculate the Fiscal Risk Index include: United Nations; International Labor Organisation; International Monetary Fund; and World Health Organisation.

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