Fiscal Sustainability: UK Plummets in Ranking due to Spiralling Debt
Spiralling debt, an ageing population and inadequate public funds have all contributed to the UK plummeting in a ranking that measures the sustainability of government finances in 145 countries.
The Fiscal Risk Index (FRI), developed by global risks advisory firm, Maplecroft, identifies countries that will come under increasing economic pressure in future years due to low birth rates and high life expectancy. It uses 12 indicators to measure a country’s fiscal risk, including child and old-age dependency ratios between 2005 and 2050, gross domestic product (GDP), fiscal debt, development levels, the structure of public finances and the extent of public spending on pensions, health and education.
The UK has dropped 36 places in the ranking from 63 and medium risk in 2009 to 27 and high risk in 2010. Britain’s rapidly ageing population is forecast to become a genuine threat to the sustainability of government finances in the longer term, while its high budget deficit poses a shorter-term threat.
Nations, such as the UK, spending high percentages of GDP on pension and healthcare, are seen as particularly vulnerable because demographic shifts towards ageing populations and a diminishing workforce will result in higher demands for public expenditure and decreases in public revenue.
“The burden of welfare provision for the elderly presents a longer term problem in Britain than the fallout of recessionary spending,” said chief executive officer (CEO) of Maplecroft, Professor Alyson Warhurst.
European countries make up nine of the 10 countries rated at extreme risk. Italy is ranked the country most at risk for the second year running, while Croatia, Slovenia, Slovakia, Japan, Ukraine, Latvia, Hungary, Austria and Portugal also feature in the highest risk category. Germany (14), Spain (23) and France (33) are all categorised as high risk nations, with US (88) rated medium risk. The demographic situation in most of these countries is accentuated further by their exposure to the global recession, which has left government balance sheets deep in the red.
By 2050, the UK’s old-age dependency ratio is projected at 38%, which while high, pales against other high risk countries, with Germany at 59%, Italy 62% and Japan leading the way at 74%.