Cover Departmental Papers
Long-Term Spending Pressures in Europe
Author:
Stephanie Eble
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Alexander Pitt
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Irina Bunda
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Oyun Erdene Adilbish
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Nina Budina
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Gee Hee Hong https://isni.org/isni/0000000404811396 International Monetary Fund

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Moheb T Malak
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Sabiha Mohona
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Alla Myrvoda https://isni.org/isni/0000000404811396 International Monetary Fund

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Keyra Primus
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Series:
Departmental Papers
Volume/Issue:
Volume 2025: Issue 002
Language:
English
Publication Date:
14 Mar 2025
DOI:
https://doi.org/10.5089/9798400295805.087
ISBN:
9798400295805
ISSN:
2616-5333
Pages:
52
Keywords:
Fiscal policy; structural reforms; climate; defense; demographics; aging; health; public debt; fiscal institutions; spending pressure; member states; EU climate goal; increase EU resilience; emissions trading system; EU financing; EU rule; carbon border adjustment mechanism; EU budget; EU country; climate goal; spending needs; Pension spending; Defense spending; Pensions; Europe; priority spending needs; data from European Union; inefficient spending; long-term spending pressure
Legal-disclaimer:
The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover Departmental Papers
Departmental Papers
ISSN:
2616-5333
Publisher:
International Monetary Fund