The President of the Independent Authority for Fiscal Responsibility (AIReF), Inés Olóndriz, took part today in the opening session on the fourth day of the Forbes Economic Summit, where she discussed the challenges population ageing poses for the economy and public finances and stressed the need to anticipate these pressures through medium-term fiscal planning.
During her remarks, which focused on the relationship between longevity, well-being and sustainability, Inés Olóndriz said that over the coming decades Spain will have a larger, but also older, population. According to AIReF’s projections, the population will increase from 49 million in 2025 to almost 53 million in 2050, mainly due to immigration. At the same time, life expectancy will continue to rise and fertility will remain low, pushing the dependency ratio from around 30% today to almost 40% in 2050.
The President said that this demographic shift will affect both the economy’s growth capacity and public finances. The working-age population will continue to grow until the middle of the next decade, when it will begin to decline. Against this backdrop, around one-third of future growth would come from higher labour force participation, lower unemployment and population growth, while the remaining two-thirds would need to come from productivity.
Pressures on public spending
At the same time, greater longevity will increase demand for certain benefits and public services. For pensions, AIReF projects nearly six million more pensions by 2050 and an increase in gross public pension expenditure from around 13% of GDP today to more than 16% in 2050.
Inés Olóndriz recalled that the assessment published by AIReF last May concluded that the pension expenditure rule is met. However, she stressed the need to distinguish between compliance with a specific rule and the sustainability of public finances as a whole.
She also noted that ageing affects more than pensions, as it will also increase spending needs for healthcare and long-term care, with the effects spread across the different levels of General Government. AIReF’s projections indicate that public revenue will gradually rise to 45% of GDP in 2050, while expenditure will grow more sharply to almost 52%.
These pressures affect General Government as a whole: the Social Security Funds bear most pension expenditure; Central Government is playing an increasing role in financing it through transfers; the Autonomous Regions manage other services affected by ageing, such as healthcare and social services; and Local Governments face needs relating to care and locally delivered services.
The President also noted that Spain already has a public debt ratio close to 100% of GDP. Under AIReF’s unchanged-policy scenario, debt would fall over the next few years, but reverse course in the middle of the next decade and rise again to around 123% of GDP in 2050.
Planning ahead and setting priorities
Against this backdrop, Inés Olóndriz highlighted the value of long-term projections in providing early warning of trends that may shape public-sector decisions, allowing more scope for a gradual response.
She identified three elements for addressing these pressures. First, a medium-term fiscal strategy to plan ahead, set priorities and determine how they will be financed. Second, stronger productivity growth, which will become particularly important as labour’s contribution to sustaining growth diminishes. Third, public policy assessment to make more effective and efficient use of limited resources.
To conclude, the President said that reconciling the well-being of a society in which people are living ever longer with the sustainability of public finances requires combining planning to anticipate and set priorities, growth to expand available resources and assessment to make better use of them.