Long abstract

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This chapter discusses the outlook for public finances given the pressures that will arise from the ageing of the population and the forces of globalisation. It looks at how public finances measure up against the government’s 2% surplus target and discusses what is needed to ensure that the current welfare system will be financially sustainable in the future. The key conclusion is that reaching the 2% target within the next 3-5 years will go a long way towards making the welfare system sustainable. But getting there requires some fiscal consolidation, and for the welfare system to be fully sustainable, additional measures are required. It would be best to bring about the necessary improvement of public finances through spending restraint and measures that boost employment and/or deliver better value for money from public services. The chapter also discusses what may look like an easy option – raising tax rates – but which may be costly and perhaps even counter-productive in the long term, because of the adverse impact on labour supply.