Download Changes in labor force participation rates to maintain 2020 overall

Towards Sustainable Social
Sector Expenditures in the New
Member Countries of the
European Union
Pradeep Mitra*
Keynote presentation at an international conference on
Advancing Economic Growth: Investing in Health
Chatham House, London, June 22-23, 2005
*Chief Economist, Europe and Central Asia Region, World Bank
Views expressed are the author’s and do not necessarily reflect those of the World Bank
Contents

Size of Government

Health sector: issues and reform options

Pensions: issues and reform options

Aging and some policy options

Conclusions
Tax revenue is high for income level,
especially in Central Europe …
Tax Revenue of the Consolidated Central Government Including Social Security (percent of GDP)
average 00-03
45
40
Slovenia
Hungary
35
Czech Rep.
Slovak Rep.
Israel
30
Poland
Estonia
Tunisia
25
Latvia
Lithuania
20
Thailand
Malaysia
Mauritius
Korea
Singapore
15
Costa Rica
Hong Kong
10
5
0
0
5000
New member states
10000
EU-15;
15000
20000
Other high-income OECD*;
25000
30000
35000
40000
45000
Middle-income high-performing countries**;
*USA, Australia and New Zealand; **The choice of middle-income high-performing countries varies from one chart to the next, in part dictated by
data availability. This does not affect the comparisons made.
Source: IMF World Economic Outlook database; IMF Government Financial Statistics database;
… driven by social security taxes
Tax Com position Structure, 2002
70
In percent of total tax burden
60
50
40
30
20
10
0
Baltic states
Central Europe
Middle-income high
performing
economies*
EU cohesion
countries**
Indirect and unclasified taxes (in percent of total tax burden)
Direct taxes
Other EU
Other high-income
OECD***
Social Security
* Malaysia, Tunisia, Brazil, Korea and Mexico; ** Greece, Ireland, Portugal and Spain; ***Australia, Japan, New Zealand and USA
Source: IMF World Economic Outlook database; OECD in figures 2004 edition
Public spending high for income level in
Central Europe …
50.0
45.0
Slovenia
Total government expenditure (in percent of GDP)
Hungary
40.0
Slovak Rep.
Czech Rep.
35.0
Poland
Latvia
Estonia
30.0
Lithuania
25.0
20.0
15.0
10.0
5.0
0.0
0
5000
10000
15000
20000
25000
30000
35000
40000
GDP per capita
New member states
EU-15;
Other high-income OECD*;
Middle-income high-performing countries**;
*USA, Australia and New Zealand; **Costa Rica, Israel, Korea, Malaysia, Singapore, Thailand and Tunisia
Source: IMF World Economic Outlook database; IMF Government Financial Statistics database; OECD in figures 2004 edition
… driven by social benefits, while …
Economic Expenditure Composition of Consolidated Central Government, 2002
20
18
16
In percent of GDP
14
12
10
8
6
4
2
0
Baltic states
Central Europe
Compensation
Middle-income high
performing economies
EU cohesion countries
Use of goods and services
Other EU
Social benefits
Source: IMF World Economic Outlook database; IMF Government Financial Statistics database; OECD in figures 2004 edition
… capital spending relatively low, …
Capital Expenditure (percent of GDP), average 1996-2001
8.00
7.00
6.00
Hungary
5.00
Slovak Rep.
4.00
Lithuania
3.00
Czech Rep.
Slovenia
Latvia
Estonia
2.00
Poland
1.00
0.00
0
5000
10000
15000
20000
25000
30000
35000
40000
GDP per capita
New member states
EU-15;
Other high-income OECD*;
Middle-income high-performing countries**;
*USA, Australia and New Zealand; **Costa Rica, Chile, Israel, Korea, Malaysia, Mauritius, Singapore and Tunisia
Source: WB SIMA; IMF World Economic Outlook database
45000
… health spending is comparable to other
European countries, and may even be on
the low side in some new member states…
12
Total health expenditure (% of GDP)
10
Hungary
8
Slovenia
Czech Rep.
Lithuania
6
Poland
Slovak Rep.
Estonia
Latvia
4
2
0
0
10000
20000
30000
GDP per capita
New member states
EU-15;
Other high-income Europe*
*Switzerland and Norway
Source: WB SIMA; IMF World Economic Outlook database
40000
50000
60000
Amongst a wider group of comparators including
well performing middle-income countries health
spending is not out of line …
12
Total health expenditure (% of GDP)
10
Hungary
8
Slovenia
Czech Rep.
Lithuania
Poland
6
Slovak Rep.
Latvia
Estonia
4
2
0
0
10000
20000
30000
40000
50000
GDP per capita
New member states
EU-15;
Other high-income Europe*;
Middle-income high-performing countries**;
*Switzerland and Norway; **Costa Rica, Chile, Israel, Korea, Malaysia, Mauritius, Singapore and Tunisia
Source: WB SIMA; IMF World Economic Outlook database
60000
… while health outcomes are broadly in
keeping with income level
Expected years spent in poor health (for males at birth)
11
Lithuania
Expected average years in poor health for males at birth
10
Latvia
Hungary
9
Poland
Slovakia
8
Czech Republic
USA
Estonia
7
Slovenia
Luxembourg
6
Denmark
5
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
GDP per capita
New member states
EU-15;
Other high-income OECD*;
Middle-income high-performing countries**;
*USA, Australia, New Zealand, Canada, Switzerland and Norway; **Chile, Costa Rica, Israel, Korea, Malaysia, Mauritius, Singapore, Thailand and
Tunisia
Source: IMF World Economic Outlook database; WHO Statistical Information System
Issues in the Health Sector



However, commitments are higher than actual spending
- health sector indebtedness is growing – and is
particularly severe in the Visegrad countries. Only
Estonia and Latvia, among the Baltic states, and
Slovenia in Central Europe have managed to exercise
adequate expenditure control
Amongst the Visegrad countries, Slovakia has managed
to reduce the recurring deficit in the health system
(through introduction of user fees, changes in
pharmaceutical procurement, and hospital restructuring)
Going forward, advances in medical technology, inter
alia, will generate pressures for higher spending
Some options to contain upward
pressures on health spending



Address oversupply of hospital infrastructure (debt
growth is particularly visible in regions with excessive or
concentrated oversupply of hospital beds) – this on the
agenda in most countries but progress slow in most
Rationalize benefits package (currently generous by
European standards), including through restricting
services available for free (co-payments for care are
limited in the Visegrad countries except Slovak Republic)
Better management of pharmaceutical expenditure –
most countries regulate price however very few have
made progress in limiting quantity (usage)
While pension spending does not appear to
be high in the European context…
16%
14%
Slovenia
Poland
Pensions as a share of GDP
12%
Hungary
10%
Czech Rep.
Latvia
8%
Slovak Rep.
Lithuania
6%
Estonia
4%
2%
0%
0
10000
20000
30000
40000
50000
60000
70000
GDP per capita
New member states
EU-15;
Other high-income Europe*
*Switzerland and Norway
Source: “International Patterns of Pension Provision” by Palacious and Parrales-Miralles, 2000; IMF World Economic Outlook
database; EUROSTAT
….amongst a comparator group which includes wellperforming middle-income countries pension spending
looks high in Central Europe
16.0%
14.0%
Slovenia
Pensions as a share of GDP
12.0%
Poland
10.0%
Hungary
Czech Rep.
Latvia
8.0%
Slovak Rep.
6.0%
Lithuania
Estonia
4.0%
2.0%
0.0%
0
10000
20000
30000
40000
50000
60000
70000
GDP per capita
New member states
EU-15;
Other high-income Europe*;
Middle-income high-performing countries**;
* Switzerland and Norway; ** Chile, Costa Rica, Israel, Korea, Malaysia, Mauritius, Singapore and Tunisia
Source: “International Patterns of Pension Provision” by Palacious and Parrales-Miralles, 2000; IMF World Economic Outlook
database; EUROSTAT
Some Issues in Pension Spending:



High spending is partly a legacy of transition – pension
systems were used to ease economic restructuring,
resulting in very high beneficiary to population ratio
Unlike health, pension reforms in new member states
(except Czech R and Slovenia) have set them on path to
sustainability
In addition to reforms in these two countries, options for
further pension reforms included: further raising
retirement ages (currently among lowest in Europe),
curbing benefits per year of service (currently among
highest in Europe), and changes to indexation to give
greater weight to protecting real incomes of pensioners)
Curbing high labor taxation and social benefits is made
more urgent by shrinking labor force and growing
elderly
Elderly population
Working age population
Source: UN Population Prospects 2004; WB staff estimates
Senior dependency ratios deteriorate continually and are
similar to EU-15, worse than US and better than Japan
Note: Senior dependency ratio is equal to share of those above 65 to working age (15-64)
Source: UN Population Prospects 2004; WB staff estimates
In addition to raising retirement age, migration
could be partial solution for most new EU
members …
Current migrant* share and additional stock to maintain 2020 overall dependency ratio** at current level
60%
50%
40%
30%
20%
Current US share of migration
10%
0%
Baltics
Japan
USA
New EU
Central
Europe
EU 15
Current
.
Latvia
2005
Estonia
Czech Slovenia Poland
Slovak Hungary Lithuania
Republic
Republic
dependency ratio, 2005
* Any foreign born resident is defined to be a migrant. ** Overall dependency ratio is equal to children (under 15) plus seniors (over 65) divided by
working age (15-64)
Source: UN Population Prospects 2004; WB staff estimates
… together with increased labor force
participation rates
Changes in labor force participation rates to maintain 2020 overall dependency ratio at current level
100
90
80
Lisbon target
70
60
50
40
30
20
10
0
New EU
Baltics
USA
Poland
Current
Source: UN Population Prospects 2004; WB staff estimates
Additional
Hungary
Latvia
Estonia
CONCLUSIONS



The size of government in the Visegrad countries and
Slovenia is too large owing to generous social benefits
financed by high social security contributions, and has the
potential to slow income convergence
Health outcomes, while poorer than EU-15, are broadly in
keeping with income levels. So is health spending, but ...
Containing pressure on health spending arising from
population aging and advancing medical technology and
improving the effectiveness of spending requires reforms
such as (i) addressing oversupply of hospital infrastructure,
(ii) rationalizing the generous benefits package provided
free and (iii) improving management of pharmaceutical
expenditures.
CONCLUSIONS (cont.)



Pension spending, while not high in a European context, is
high for income levels, particularly in Central Europe (the
Visegrad countries and Slovenia). However, pension
reform in all but Czech Republic and Slovenia has
improved fiscal sustainability. In addition to reform in these
two countries, further reforms in all countries could include
(i) further raising retirement ages, (ii) curbing benefits per
year of service, and (iii) changes to indexation to give
greater weight to protecting real incomes of pensioners.
Continuing health and pension reforms are needed to
create the fiscal space for capital spending (including
infrastructure), which is low compared to well-performing
middle-income countries.
Broader policy options to contain the dependency ratio at
current levels in the face of an aging population in the new
member states include an increase in immigration and
raising the rate of labor force participation.