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Fiscal sustainability – Maplecroft rates “ageing” UK as high risk country for first time

04/03/2010

Italy, Japan, Austria and Portugal at extreme risk

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, 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, whilst its high budget deficit poses a shorter term threat.

Fiscal Risk Index 2010

Legend
Extreme risk
High risk
Medium risk
Low risk
No Data

Rank	Country	Rating
1	Italy	Extreme
2	Croatia	Extreme
3	Slovenia	Extreme
4	Slovakia	Extreme
5	Japan	Extreme

Rank	Country	Rating
6	Ukraine	Extreme
7	Latvia	Extreme
8	Hungary	Extreme
9	Austria	Extreme
10	Portugal	Extreme

© Maplecroft 2010

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."

- Professor Alyson Warhurst, CEO of Maplecroft.

European countries make up 9 of the ten countries rated at extreme risk. Italy is ranked the country most at risk for the second year running, whilst 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 USA (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 whilst high, pales against other high risk countries, with Germany at 59%, Italy 62% and Japan leading the way at 74%.

Maplecroft analyst, Fiona Place, expects that business will have to play an increasing role in the long-term futures of employees, as governments struggle to cope with the escalating costs of welfare for the elderly.

"Mounting strains will be put on social security and pension systems in all countries and employers across all sectors may well be called upon to contribute and facilitate private provisions. In high and extreme risk nations, corporate pension schemes and health programmes could become necessary to preserve productivity."

- Fiona Place, analyst at Maplecroft

For more information on how to buy the Fiscal Risk Index contact info@maplecroft.com or register for trial access to the Global Risks Portfolio.