How large is the long-term fiscal challenge in OECD countries?

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OECD governments face growing long-term fiscal pressures from high debt and deficits, rising financing costs, ageing populations and the increasing cost of public services. New estimates from the OECD Long-Term Model assess the scale of the fiscal adjustment needed.

by Yvan Guillemette, OECD Economics Department

Most OECD governments face significant long-term fiscal challenges. Many have higher debt than a decade ago, sizeable budget deficits, rising financing costs and growing spending pressures from population ageing and the increasing relative cost of government-provided services. An indication of the scale of the challenge is provided by new estimates of long-run fiscal adjustment needs from the OECD Long-Term Model (LTM). These are presented in a new paper that describes the methodology used in detail and incorporates recent improvements, including the addition of defence expenditure as a source of fiscal pressure.

The fiscal adjustment needed to stabilise the debt-to-GDP ratio close to its current level over a chosen horizon is estimated using a long-run fiscal gap. This considers the current fiscal position as well as projected growth, interest rates and expenditure pressures. Such estimates are not forecasts but illustrate the pressures that could emerge in the absence of offsetting policy action.

Long-run fiscal gaps are sizeable

For the median OECD and accession country, the long-run fiscal gap is 4.7 percentage points (pp) of GDP at the 2060 horizon (Figure 1). In ten countries, it exceeds 8 pp. The gap is marginal (less than 0.5 pp) or negative in only three countries: Denmark, Iceland and Ireland. This reflects relatively strong initial fiscal positions and low or negative net public debt, as well as, in Denmark’s case, statutory retirement ages that are linked to life expectancy. The main sources of these long-run fiscal gaps are weak initial fiscal positions relative to those needed to keep debt-to-GDP ratios stable (contributing 0.9 pp of GDP in the median country), and population ageing, which raises public expenditure on both pensions (2.2 pp) as well as health and long-term care (1.8 pp). Higher defence spending adds to these pressures in many countries.

Governments have choices about how and when these pressures are met, but the pressures will become greater and more urgent the longer such choices are delayed. The appropriate policy mix will differ across countries and could include revenue measures, expenditure restraint, pension and health reforms, policies to raise employment and productivity, and, in some cases, additional debt financing. If governments do not act to address fiscal pressures, debt will rise. If higher spending on pensions, health, long-term care, defence and debt interest is met entirely through additional borrowing rather than by other budgetary offsets, net government debt could rise by 43 pp of GDP by 2045 in the median country and much more in some individual countries (Figure 2).

Growth helps, but how it is generated matters

Recent work at the OECD has highlighted the importance of favourable cyclical conditions for sustained debt reduction (Pina, Hitschfeld and Miyahara, 2025). The LTM analysis shows that stronger growth can help, but it is not necessarily a fiscal panacea and dependent on policy choices by governments. A reform-driven 10% increase in potential output by 2060 has surprisingly little effect on the median fiscal gap if it comes entirely from higher labour productivity. Higher productivity raises GDP, but it also tends to increase wages and therefore the cost of labour-intensive public services, as well as benefits if these are linked to wages rather than prices.

The picture is different if higher output comes from increased employment. Achieving the same 10% increase in potential output through higher employment reduces the median fiscal gap by around 2½ pp of GDP. Having more people in work increases the number of contributors relative to beneficiaries, generating a substantially larger fiscal dividend.

This makes policies that expand employment particularly valuable from a fiscal perspective. Higher migration can also help when it makes the population younger. A scenario in which annual net migration gradually rises by 0.1% of the baseline population reduces the median fiscal gap by about 0.6 pp of GDP by 2060. Similarly, increasing statutory retirement ages by one year reduces the gap by around 0.4 pp.

Changes in pension generosity could have much larger fiscal effects but would also involve more difficult trade-offs. Switching from wage to price indexation of pension benefits could reduce the median long-run fiscal gap by around 4½ pp of GDP. However, maintaining price indexation over a long period would progressively reduce pensions relative to wages, creating a widening disparity between the incomes of workers and retirees.

References

Guillemette, Y. (2026), “Illustrating long-run fiscal challenges using the Long-Term Model”, OECD Economics Department Working Papers, No. 1877, OECD Publishing, Paris, https://doi.org/10.1787/421bf86f-en

OECD (2025), “OECD global long-run economic scenarios: 2025 update”, OECD Economic Policy Papers, No. 36, OECD Publishing, Paris, https://doi.org/10.1787/00353678-en.

Pina, Á., M. Hitschfeld and T. Miyahara (2025), “Drivers of public debt reductions: Lessons from past episodes in OECD countries”, OECD Economics Department Working Papers, No. 1841, OECD Publishing, Paris, https://doi.org/10.1787/89a45c05-en