Creating fiscal space to pay for pension expenditure in Asia

Many Asian countries are projected to age rapidly and will need to devote a larger proportion of their GDP to finance age-related expenditure including on pensions. Governments therefore will have to create additional fiscal space to fund such expenditure to sustain the credibility of existing pension promises. This paper presents an exploratory framework for creating fiscal space. The framework has three interrelated components: enhancing broad-based growth, improving revenue performance and better expenditure management. The paper distinguishes between funding of pensions, i.e. the share of GDP devoted to pensions, and financing of pensions, i.e. the different methods and instruments used to finance pensions. The focus of the paper is on funding, and the framework relies on both the income–expenditure flows and the government balance sheet to create fiscal space. Several examples of how potential fiscal space can be created in Asian economies of China, India and Indonesia to make their pension promises more credible are provided. The paper emphasises that the measures discussed for enhancing fiscal space should not be undertaken as a purely technical exercise, but should be combined with managing the political economy in a given context.