Departmental Papers

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Format: Chicago

Stephanie Eble, Alexander Pitt, Irina Bunda, Oyun Erdene Adilbish, Nina Budina, Gee Hee Hong, Moheb T Malak, Sabiha Mohona, Alla Myrvoda, and Keyra Primus. "Long-Term Spending Pressures in Europe", Departmental Papers 2025, 002 (2025), accessed March 15, 2025, https://doi.org/10.5089/9798400295805.087

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Disclaimer: The views expressed herein are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

European countries face high, rising, and long-lasting spending pressures, calling for a renewed focus on fiscal policy and comprehensive structural reforms to prepare their economies for the future. On top of existing fiscal consolidation needs, spending pressures in five key areas are imminent and growing in Europe: pensions and healthcare/long-term care driven by population aging; climate transition; increased defense spending; and higher borrowing costs. Some pressures are immediate, others will build up over time. Projections indicate that additional expenditures could reach 5¾ percent of GDP annually by 2050 in Advanced Europe and 8 percent in Central, Eastern, and Southeastern Europe (CESEE). Addressing these challenges will require extensive efforts, including enhancing institutional capacity and implementing deep structural reforms to manage spending, ensure adequate revenue, and meet environmental, social, and security objectives. Policymakers must also consider the distributional impacts of reforms, particularly on vulnerable households. A broad reform agenda tailored to country circumstances is essential, with urgent actions needed in many countries to ensure the sustainability of pension systems and to combat climate change through fiscal instruments like carbon pricing. Increased revenue mobilization, particularly in CESEE, and the reduction of inefficient spending are critical for creating fiscal space for priority expenditures. Strengthening the EU's fiscal capacity to provide common public goods such as climate, defense, energy security, and R&D and implementing structural reforms to enhance growth potential are also vital. However, raising awareness of these issues and implementing the necessary reforms will be challenging. A well-designed fiscal framework that incorporates long-term spending pressures, supported by comprehensive analysis and data, is crucial for informing public debate and guiding national decision-making to ensure that spending pressures are adequately addressed. Ultimately, inaction is not an option, as it risks fiscal sustainability and the fulfillment of priority spending needs.

Subject: Aging, Defense spending, Expenditure, Labor, Pension spending, Pensions, Population and demographics

Keywords: Aging, Carbon border adjustment mechanism, Climate, Climate goal, Data from European Union, Defense, Defense spending, Demographics, Emissions trading system, EU budget, EU climate goal, EU country, EU financing, EU rule, Europe, Fiscal institutions, Fiscal policy, Health, Increase EU resilience, Inefficient spending, Long-term spending pressure, Member states, Pension spending, Pensions, Priority spending needs, Public debt, Spending needs, Spending pressure, Structural reforms

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