Long abstract

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The current crisis is undermining the fiscal position while the increase of costs of ageing is expected to start accelerating substantially in the coming years. Thus, the room for discretionary fiscal policy to support the economy is limited and the effectiveness of unilateral stimulus measures beyond those already adopted is constrained. However, such short-term measures provide an opportunity for introducing long-term structural reforms as part of the package. The fiscal consolidation efforts, supported by relatively high GDP growth and low interest rates on public debt during the past years, have recently faltered and the objective of generating increasing surpluses has become unrealistic in the medium run. Looking forward, the main challenge for fiscal policy is to devise a realistic and credible path towards fiscal sustainability. With a weaker than earlier expected role for prefunding, renewed efforts to control the growth in ageing related costs should include a pension reform. Significant institutional reforms can help improve the credibility of future commitments.