Generational Accounts in the Czech Republic

Abstract

The government intertemporal budget constraint states that all public liabilities have to be financed by either current or future generations. The generational accounting approach incorporates the expected demographic development and the parameters of the current fiscal policy into the intertemporal government budget constraint. By contrast with the public debt and deficit, the indicators based on generational accounting are forward looking and provide us with additional information about the current fiscal policy. To assess the sustainability of public budgets we constructed the first set of generational accounts for the Czech Republic. We found that a representative living agent obtains more benefits than he/she pays in taxes in 2004, i.e. the generational account of this representati ve agent is negative. In addition, the total amount of the government liabilities resulting from the current fiscal policy pursued to 2150 reaches about 300% of GDP in 2004. Finally, the costs of postponed adjustment of government revenues and expenditures seem to be considerable. We conclude that the present fiscal policy is not sustainable, i.e. public budgets in the Czech Republic should be stabilized by changing the current system of taxes and benefits to reflect potential demographic development.Fiscal sustainability, generational accounting.