WORKING PAPER SERIES 2
Kamil Dybczak:
Generational Accounts in the Czech Republic
WORKING PAPER SERIES
Generational Accounts in the Czech Republic
Kamil Dybczak
2/2006
CNB WORKING PAPER SERIES
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Project Coordinator: Vladimír Bezděk
 Czech National Bank, May 2006
Kamil Dybczak
Generational Accounts in the Czech Republic
Kamil Dybczak 
Abstract
The government intertemporal budget constraint states that all public liabilities have to be
financed by either current or future generations. The generational accounting approach
incorporates the expected demographic development and the parameters of the current fiscal
policy into the intertemporal government budget constraint. By contrast with the public debt
and deficit, the indicators based on generational accounting are forward looking and provide us
with additional information about the current fiscal policy. To assess the sustainability of public
budgets we constructed the first set of generational accounts for the Czech Republic. We found
that a representative living agent obtains more benefits than he/she pays in taxes in 2004, i.e.
the generational account of this representative agent is negative. In addition, the total amount of
the government liabilities resulting from the current fiscal policy pursued to 2150 reaches about
300% of GDP in 2004. Finally, the costs of postponed adjustment of government revenues and
expenditures seem to be considerable. We conclude that the present fiscal policy is not
sustainable, i.e. public budgets in the Czech Republic should be stabilized by changing the
current system of taxes and benefits to reflect potential demographic development.
JEL Codes: H61, E62.
Keywords: Fiscal sustainability, generational accounting.

Kamil Dybczak, Czech National Bank (kamil.dybczak@cnb.cz).
This work was supported by Czech National Bank Research Project No. B5/2003.
The author is deeply indebted to Vladimír Bezděk for valuable discussions and suggestions. The comments
provided by Roberto Cardarelli, Narcisa Kadlčaková, Marek Mora, Ondřej Schneider, Kateřina Šmídková and
Radka Štiková are highly appreciated. The views expressed are those of the author and do not necessarily reflect
the official views of the Czech National Bank. The usual disclaimer applies.
2 Kamil Dybczak
Nontechnical Summary
The government intertemporal budget constraint states that all public liabilities have to be
financed by either current or future generations. Since the size and the structure of these
generations vary over time, even unchanged fiscal policy can generate a different per capita
lifetime burden of a representative current and future agent. The generational accounting approach
incorporates the expected demographic development and the parameters of the current fiscal
policy into the intertemporal government budget constraint. Afterwards, based on this
methodology, different indicators of fiscal sustainability are derived. By contrast with the public
debt and deficit, these indicators are forward looking and provide us with additional information
about the current fiscal policy.
Unlike the previous studies of fiscal sustainability in the Czech Republic, the generational
accounting approach captures sustainability from both the aggregate macroeconomic and
representative agent's point of view. In our analysis both the residual and the sustainability
approaches were implemented. We found no effect of different values of the discount rate, labour
productivity growth and combinations thereof on the main results of our analysis. A representative
living agent obtains more benefits than he/she pays in taxes in 2004, i.e. the generational account
of this representative agent is negative. By contrast, a representative agent not yet born will face
the opposite situation. Thus, the present fiscal policy is not sustainable, owing to the unequal
treatment of current and future representative agents. In addition, if the discount rate equals 5%
and productivity grows at 2% per year, we quantified the total amount of the government
liabilities resulting from the current fiscal policy pursued to 2150 at about 300% of GDP in 2004.
Thus, taking into account future demographic development and a strict indexation rule, the fiscal
policy appears to be unsustainable. Finally, we found the costs of postponed adjustment of
government revenues and expenditures to be considerable and rising over time.
To summarise, we found the system of revenues and expenditure in the Czech Republic to be
facing structural problems. So, even when the discount rate and labour productivity growth are set
propitiously, the system of public finances remains unsustainable. In addition, the negative impact
of demographic changes will aggravate the development of public finances in the future.
According to the present analysis, the public budgets in the Czech Republic should be stabilized
by changing the current system of taxes and benefits to reflect potential demographic
development.
Generational Accounts in the Czech Republic 3
1. Introduction
The government provides a number of public services and commodities, such as health care,
education, infrastructure etc. Some people take advantage of consuming them more than others.
For example, education expenditures are aimed mainly at young people, while older people do not
take advantage of the public education system at all. By contrast, pensioners receive retirement
pensions which are not addressed at young people, etc. Since public services and commodities are
consumed differently through the lifespan, it follows that the amount of public expenditure is
affected by the size and structure of the population.
At the same time, all expenditures have to be financed. The main part of government revenues
comes from taxes and wealth sales. Unfortunately, government wealth is limited in general, i.e.
privatization revenues are at the government's disposal to only a limited extent. Usually other
revenue sources are also restricted.1
Thus, the major part of expenditures has to be financed by
taxes. This means that agents finance public services (commodities) indirectly through taxes. As
in the case of expenditures, the total amount of public revenues depends on the size and the
structure of the population.
Generally speaking, people pay taxes and receive benefits according to their position in the life
cycle. If we divide society into three age groups (young, middle-aged, old), then only the middle-
aged pay more into the public budgets than they receive. By contrast, the young and the old
contribute to the public budgets to a very limited extent. Thus, a representative agent of a certain
age is either a net contributor or a net beneficiary. This idea comes from the life cycle hypothesis.2
From our point of view it is important that people pay taxes and receive transfers differently over
their lifespan. Based on these arguments, it follows that the size and structure of the population
decisively affect the balance of public budgets.
In fact, the government does not have to pay all its expenditure immediately using just tax
revenues and privatization receipts. Where the government's expenditures exceed its revenues, it
takes out a loan or issues bonds. Still, these obligations will have to be repaid one day. From the
generational point of view this means that the use of alternative ways of financing results in shifts
in the financial burden from current to future generations, i.e. so-called `intergenerational
redistribution'. Thus, current fiscal policy affects the net wealth not only of generations alive at
present but also of generations not yet born.
Unfortunately, neither the commonly used public budget deficit nor public debt records any
intergenerational shifts or the way in which current fiscal policy influences the net wealth of a
representative current and future agent. One of the tools which can be used to assess
intergenerational balance or imbalance is so-called `generational accounting'. This approach
reflects the long-term implications of current fiscal policy arrangements for intergenerational
redistribution and fiscal sustainability taking into account the expected demographic development.
Thus generational accounting can provide us with additional information about the current state of
1
Although seigniorage can be an important part of public revenue, we do not include it in our analysis. This
reflects the Czech reality. In the past the Czech National Bank (CNB) did not transfer seigniorage to the
government because it was making losses. Moreover, since the CNB has accumulated a large stock of debt, the
same fact holds for the near future.
2
See Modigliani (1963).
4 Kamil Dybczak
fiscal policy and its potential implications next to the standard fiscal indicators. This methodology
was developed by Auerbach, Gokhale and Kotlikoff in 1991. The main issue was to quantify the
impact of a government policy on the net wealth of current and future generations. As a result, the
tool is used as an instrument for assessing the sustainability of the current settings of public
finances taking into account the expected demographic development.
It is important to note that generational accounts do not provide the exact level of future
government deficits. This is definitely not a forecasting tool. The goal is to compare the present
value of the growth-adjusted lifetime burden faced by a representative current and future agent on
condition that the intertemporal budget constraint holds. Alternatively, it is possible to calculate
the total amount of the government liabilities stemming from the current fiscal policy proceeds
indefinitely. Moreover, alternative scenarios could help to identify potential ways of improving
the intergenerational imbalance. The sustainability of various tax and expenditure variants could
be assessed by the same token.
The classical generational accounting methodology evaluates taxes and transfers as monetary
flows. Alternatively, generational accounts can be defined as a utility balance that results from the
interaction between individuals and the public sector. In this case we would have to assess the
individual's utility (disutility) of each component of net taxes over time. In our study we follow
the monetary approach, since deciding on the utility of each public item seems very speculative.
There is some criticism of the generational accounting methodology from both the theoretical and
practical points of view.3
We would like to stress that generational accounting is not a
generational equilibrium model based approach, but just an indicator based on a trend projection.
On the contrary, this projection is elaborate, introducing some economic theory and expected
demographic development. Using the generational accounting methodology we can infer what
situation would arise if the present fiscal policy stayed unchanged provided that the rest of the
economy does not react. The results can identify the intergenerational redistribution which would
result from the government's current financing and spending decisions.
The purpose of this paper is to assess the sustainability of the present fiscal policy in the case of
the Czech Republic using the generational accounting methodology. Whereas generational
accounts have been widely used for more than a decade worldwide, this is the first version of the
generational accounts for the Czech Republic.4
Some authors have improved the generational
accounts method, but we present more or less the original version without applying any special
technique. In what follows, sections 2, 3 and 4 review the standard methodological framework of
generational accounting. Section 2 discusses the theoretical framework of generational
accounting. The third section specifies the variables and the parameters necessary to calculate the
generational accounts of the current generations. Section 4 presents two main methods of
assessing fiscal sustainability. In sections 5, 6 and 7, applied data and empirical results are
presented.
3
See, for example, Auerbach, Gokhale and Kotlikoff (1994), who provide an extensive response to the critique
of the method of generational accounting.
4
An overview of the application of generational accounting in different countries is provided by Auerbach,
Kotlikoff and Leibfritz (1998).
Generational Accounts in the Czech Republic 5
2. Intertemporal Public Budget Constraint
The government intertemporal budget constraint says that the present value of current and future
government revenues has to be equal to the sum of the present value of current and future
government purchases and the level of net debt. In other words, net public debt Dt plus the present
value of all net government purchases Gt,y have to be financed by the present value of the lifetime
net taxes Nt,k paid by both current and future generations. Put formally, the government
intertemporal budget constraint is stated as follows:
(1)
where Gt,y stands for the present value of year y net public purchases in period t (base year).5
Gt,y
is calculated as the present value of the difference between public expenditures and revenues not
affected by the size of the population. Dt is defined as the public debt in year t less the present
value of expected privatization revenues.6
Finally, Nt,k denotes the present value of net taxes
which will be paid through the life cycle by agents born in year k.7
It is obvious that the first item
on the left hand side corresponds to the sum of the present values of all net taxes paid by currently
living agents from now to the end of their lives. The second item on the left hand side tallies with
the cumulative present value of lifetime net taxes of agents not yet born. The following section
discusses all the variables step by step.8
Contrary to Gt,y, Nt,k denotes the present value of the
difference between public revenues and expenditures affected by the size of the population. The
distinction between public revenues and expenditures whose development is or is not affected by
the size of the population is a standard procedure for generational accounting construction.
3. Specifications and Projections of Variables and Parameters
3.1 Lifetime Net Taxes of Current Generations
The standard concept of generational accounting draws a line between the current and future
generations. In the great majority of applied studies, generational accounts are constructed as a
forward-looking indicator. This means that we reflect only the current and expected development
of population size and structure. It follows that the total net taxes of currently living generations in
present terms do not take into account the development of taxes and transfers before the base
5
All the fiscal data (Gt,y, Dt and total Nt,k) come from GFS 2004 (consolidated public budgets). For details see
Appendix I.
6
Sometimes government net wealth Wt is used instead of net public debt, with the opposite sign. Because of the
lack of data on government net wealth in the Czech Republic we prefer the variable Dt. Arguments can be found
in section 5.4.
7
The symbolism is similar to Bonin (1997). Another, probably widely used, specification comes from Auerbach,
Kotlikoff and Liebfritz (1998).
8
Although we distinguish between genders in the results, we suppress sex subscripts in all equations.


=

+=-=
+=+
ty
tyt
tk
kt
t
Ltk
kt DGNN ,
1
,,
6 Kamil Dybczak
year.9
Put differently, since generational accounts are constructed as a forward-looking indicator
we do not cover the development of net taxes over the whole lifecycle for all currently living
generations. In fact, the only current generation which we follow over the whole lifespan is the
youngest one, i.e. the one born in the base year t.10
The current generations are defined as all agents who live in the present. Let t be the base year and
L be the maximum length of life, then current agents were born between t-L and t. Thus, the
present value of all net taxes paid by currently living agents is quantified over the period from t to
t+L, i.e. until the youngest agent (born in the base year t) from the current generations dies. The
first term on the left hand side in (1) can be expressed as:
(2)
where Pi,k is the number of people born in k and still living in i. Next, ti,k represents the absolute
level of the net taxes paid in period i by a representative agent born in k. The discount rate r
converts future net taxes to the base year. We presume that r is constant over the whole period.
To quantify the total net taxes of currently living generations in present terms, according to
formula (2), we need a projection of demographic development as well as the projection of the net
taxes paid in period i by a representative agent born in year k. On the one hand, the demographic
projection is usually received from the national statistical office or other institution and accepted
as it is. On the other hand, the base-year age-specific per capita taxes and transfers tl
i,k of type l are
projected by applying the constant (time invariant) growth rate g.11
It is usually assumed, for
projection purposes, that the growth rate g should reflect labour productivity growth, i.e. age- and
gender-adjusted per capita taxes and transfers grow at the rate of labour productivity. Thus,
applying constant g does not alter the shape of the particular average absolute tax and transfer age
profiles. It follows that the share of the corresponding items in the income of a representative
agent of the same age and gender is constant over time, i.e. all individuals of the same age and
gender face the same lifetime net tax rate.12
tl
i,k can be calculated for different k in each year i
using the formula (4).
(3)
9
Gokhale J., Page B. (1997) calculated total net taxes of all current generations taking into account demography
together with taxes and benefits also before the base year.
10
Later in this section we will show that this is the only generation out of the currently living population whose
generational account will be used for evaluating the sustainability of the current fiscal policy.
11
Just as in the case of r we assume g to be constant over the whole period, but alternative scenarios are
presented in section 6.
12
Introducing this assumption seems to be the standard approach to generational accounts. By contrast,
reflecting potential changes in age-specific profiles as a result of population ageing could make the projections
more reliable.
 +
+
=-=-=
=
Lkt
Ltk
t
Ltk
ktN ti
i-t
ki,ki,, r)(1Pt
tgt
l
jkt
jl
kjt -+ += ,, )1(
Generational Accounts in the Czech Republic 7
where tl
i,k expresses the average tax or transfer of type l of the representative agent born in k in
year i.13
If tl
i,k is positive (negative) then the item represents a tax (transfer) paid (obtained). We
should stress that the key lies in deciding what taxes and transfers are influenced by the number of
people and the age structure of the population.14
It seems almost impossible to specify the
components of net taxes precisely, since both the revenue and expenditure sides of the public
budgets contain a wide variety of items. For some of them it is hard to decide which group they
should belong to. Thus a close examination of the individual items is necessary.
Finally, aggregating all the taxes and transfers of type l, we get the absolute net taxes of a
representative agent born in k in year i, i.e. ti,k .15
(4)
It is worth noting that neither in the residual approach nor in the sustainability approach16
is the
total present value of the net taxes of the current generations restricted. Whatever approach we
choose, the total present value of the net taxes of the current generations is quantified using the
same procedure, i.e. formula (2) is applied.
3.2 Generational Accounts of Current Generations
The length of the remaining lifespan (k+L-t) of currently living agents varies in the base year
because of different k. Thus, the present values of the remaining lifetime net taxes of currently
living generations born in k, defined as Nt,k, are not directly comparable among themselves. But it
is possible to compare the net taxes in present value terms of a representative agent of age i-k in
the base year t. Finally, we define a year t account of a generation born in k as the present value of
taxes paid minus the present value of transfers obtained throughout the rest of the life divided by
the number of agents in the base year t. Generational accounts for different k are calculated
according to formula (5) and labelled as GACUR
t,k.
(5)
The expression Pi,k/Pt,k in formula (5) represents the ratio of the population born in k and still alive
in i to the base year t, i.e. it can be called a survival probability. Since the population dies out, it is
clear that Pi,k<Pj,k where i>j.17
Using equation (2) we can present the generational account
equivalently as shown in formula (6). Put differently, the generational account stands for the
present value net taxes of a representative agent born in k and still living in t.
13
Section 5 provides a detailed description of the different types of taxes and transfers. The data used for
estimation purposes are described as well. In addition, Appendix II presents figures of different tl
.
14
The inputs to the generational accounts will be discussed in section 5.
15
Taxes are treated in positive terms and transfers in negative terms.
16
Both the residual and sustainability approaches are discussed in detail in section 4.
17
This effect can be mitigated by migration.
P
r)(1Pt
,
ti
i-t
ki,ki,
,
kt
Lk
CUR
ktGA
 +
+
=
=
=
l
l
kiki tt ,,
8 Kamil Dybczak
P ,
,
,
kt
ktCUR
kt
N
GA = (6)
where Nt,k represents the present value of the lifetime net taxes which are paid by individuals born
in k and still living in the base period t.
Identically to the end of the preceding subsection, we would like to note that the quantification of
the generational accounts of currently living generations is not influenced by the following either
residual or sustainability approach.
3.3 Government Purchases
It should be pointed out that Gt,y has a different meaning than government consumption in the
national accounts. According to the generational accounts methodology, Gt,y is defined as the
balance of expenditure and revenue items which do not count towards net taxes. In other words,
Gt,y is composed of revenues and expenditures whose size does not depend on the size of the
living population. The projection method of government purchases is similar to the one discussed
before in relation to the projection of age-specific tax and transfer profiles. The projection is even
simpler, because it is not necessary to estimate the amount relating to the specific age group. The
total amount is projected using the similar growth rate g as in the case of the age-specific tax and
transfer profiles.
4. Intergenerational Imbalance and Fiscal Sustainability Appraisal
The theoretical concept of generational accounting is widely accepted. But there are several ways
of constructing generational accounts. Many countries now publish their generational accounts
complete with the methodology used. The main idea is uniform, but important partial differences
can still be found. To assess the intergenerational imbalance (sustainability of public finances),
different indicators based on the generational accounting methodology can be constructed. In the
following sections, two major approaches will be discussed ­ the residual and the sustainability
approach. But alternative ways can also be applied.18
4.1 Residual Approach and Generational Accounts of Future Generations
The present fiscal situation can be resolved by introducing alternative adjustments. First, the net
taxes of the present agents can be modified. Second, the government has the possibility of
reducing the actual and potential level of its purchases. Third, the government might not want to
solve the unfavourable situation immediately, i.e. it can defer solving the problem to the future.
As a consequence, the total net taxes of future agents are implicitly increased. In the residual
approach we assume that the government is not willing to change the current settings of the
system for the time being. As a result, all the changes needed to attain fiscal sustainability will be
faced by future generations.
18
For example, Cardarelli, Sefton and Kotlikoff (1999) consider a necessary change in government purchases or
a change in the specific net tax rate to close the sustainability gap as alternative indicators of intergenerational
imbalance/fiscal sustainability.
Generational Accounts in the Czech Republic 9
The residual approach proceeds in the following steps. First, the total present value of the net
taxes of all currently living agents is calculated, applying no constraint on its value, using formula
(2). Second, the present value of expected net public debt and net public purchases is calculated.
Finally, the intertemporal budget constraint is applied to calculate the sum of the present value of
the net taxes of future agents. Since the intertemporal budget constraint must hold, the sum of the
present value of the net taxes of all future generations is calculated as a residual, as presented in
equation (7). Hence in the residual approach all fiscal parameters have already been fixed except
the ones which influence the total present value of the net taxes of future generations. This is the
only variable which can vary. Put differently, a current fiscal policy that improves current agents'
wealth will ceteris paribus burden future generations in the negative direction, and vice versa.
(7)
The size and structure of future generations vary over time. In addition, labour productivity is
increasing. Thus, it is not possible to directly compare the absolute levels of the present value of
the total lifetime net taxes of the currently living and future generations as calculated using
formulas (2) and (7). Indeed, we have to reflect expected demographic development as well as the
growing labour productivity if we want to compare the fiscal burden which will be faced by a
representative current and future agent.
We have already presented the way in which the generational accounts of currently living
generations are computed using formula (5) or (6). There is only one current generation which we
follow over the whole lifespan, i.e. the youngest one. Its generational account (GACUR
t,t ) will be
compared with the generational accounts of future generations.
There are few ways of calculating future generational accounts. Usually the generational accounts
of future agents are assumed to be equal except for a productivity growth adjustment.19
Taking
into account these assumptions the generational account of a representative future agent is
calculated as follows:
(9)
Because the generational accounts of both generations (GACUR
t,t , GAFUT
k,k) reflect the expected
lifetime growth-adjusted net tax payments of a representative agent discounted to the base year,
they are directly comparable.
In the residual approach, the condition for examining the sustainability of a particular fiscal policy
is based on comparing the growth-adjusted net taxes of current and future representative agents. It
follows that different treatment of current and future generations from the point of view of the net
taxes of a representative agent is a criterion for deciding about the size and direction of the
19
Unfortunately, introducing the above assumptions, the residual approach does not enable us to express
anything about redistribution within future generations.


+=
-
+=






+
+
=
1
,,
1
,
)1(
)1(
tk
tk
FUT
kkkk
tk
kt
r
g
GAPN
 -=

=

+=
-+=
t
Ltk
kt
ty
tyt
tk
kt NDGN ,,
1
,
10 Kamil Dybczak
intergenerational redistribution. In other words, comparing the value of GACUR
t,t and GAFUT
k,k
reflects the intergenerational shifts necessary to sustain public budgets. It means that when
applying the residual approach a fiscal strategy which affects current and future agents differently
(GACUR
t,t  GAFUT
k,k), is called intergenerationally imbalanced. Because intergenerational shifts are
necessary to ensure the validity of the intertemporal budget constraint, such a fiscal policy is also
called unsustainable. Looking at the problem from the other perspective, we see that a sustainable
fiscal policy will not lead to any intergenerational redistribution and GACUR
t,t = GAFUT
k,k.
4.2 Sustainability Approach
The sustainability approach looks at current and future generations in the same manner. This
means that the total lifetime net taxes of current and future generations are constructed using the
same procedure, i.e. using formula (2) and its modification for future generations. Consequently,
the total lifetime net taxes of all generations are constructed without applying the intertemporal
budget constraint. The sustainability approach takes into consideration the overall demographic
development of all generations.
The sustainability approach slightly modifies the budget constraint. The items of the budget
constraint in formula (10) are constructed in the same way as in the residual approach except for
the sum of the total present value of net taxes of future generations. The criterion of fiscal
sustainability is the so-called `sustainability gap'.20
It is defined as the total amount of the
government liabilities resulting from the current fiscal policy pursued indefinitely, i.e. the
imbalance in the intertemporal budget constraint. Alternatively, the sustainability gap equals the
total present value of lacking public revenues which is desired to fulfil the intertemporal public
budget constraint. On the one hand, if the sustainability gap is positive the present value of all
potential public expenditures exceeds the present value of all public revenues. Thus, the gap
shows the size of the liabilities that the government will have to redeem. On the other hand, a
negative sustainability gap indicates a government intertemporal surplus and the option of
reducing net taxes.
(10)
where N't,k indicates the total present value of the net taxes of future agents resulting from
pursuing the present fiscal policy indefinitely. Because the sustainability approach does not
distinguish between current and future generations, we can simulate the impact of a tax or a
transfer on both living and future generations. But at the same time, by contrast with the residual
approach, we know nothing about intergenerational redistribution.
Since the absolute present value of the sustainability gap is hard to interpret, it is recommended to
relate the sustainability gap to GDP. This ratio can be used for international comparison. As in the
previous approach the final result should not be used as a forecast of public indebtedness.
20
It is possible to find other names for this indicator; for example, Cardarelli, Sefton and Kotlikoff (1999) call it
the `intertemporal budget gap'.
DNNGSG t
tk
kt
t
Ltk
kt
ty
ytt
+--=  

+=-=

= 1
,,,
Generational Accounts in the Czech Republic 11
5. General Data Description
In creating generational accounts for the Czech Republic, we follow the standard procedure. The
empirical evaluation of the intertemporal budget constraint requires projections of population,
taxes, transfers, government purchases and the initial value of net public debt. At the same time
the value of parameters g and r has to be set. We start with the 2004 data. The main data sources
used are the FoS UK (Faculty of Sciences, Charles University, Prague) population projection21
the
CZSO (Czech Statistical Office) household budget survey and the MF (Ministry of Finance)
government financial statistics.
5.1 Demography
Generational accounting is based on a long-term population projection, i.e. demography plays a
key role in determining the size of the intergenerational imbalance. Because generational accounts
(GACUR
t,,k and GAFUT
k,k) are defined as per capita net taxes in present terms, the value is influenced
by the size of the generation. Since the size of future generations is expected to fall in the coming
decades, the total amount of net taxes Nt,k is divided by a smaller number Pk,k. In other words, the
accumulated public debt will have to be financed by a smaller number of people. In addition, the
structure of the population critically influences the absolute amount of net taxes.
The original idea presented in the previous sections assumes that all government obligations have
to be financed over an infinite time horizon. In practice it is not realistic to project all the
necessary data to infinity. It is presumed that a nearly 150-year time horizon is long enough.22
There are important differences between males and females. Women live longer than men on
average, but there are other distinctions which significantly affect the generational accounts. For
example, due to wage discrimination, the wage of the average woman is not as high as that of the
average man, so direct taxes and social security contributions are also different. In addition, the
amount of indirect taxes differs as a result of the different consumption behaviours of the two
genders.
5.2 Age-Specific Revenues and Expenditures23
The main part of the revenue and expenditure age profiles was taken from the Household Budget
Survey 2002. In our particular case we constructed age-specific profiles just using year 2002 data.
First, it is difficult to acquire and treat the data. Second, we believe that a change in age-specific
profiles needs strong incentives and moreover takes more years. Thus, we found no major flaws
using just one year observations. The raw data is rather erratic, but a still apparent age-specific
profile can be recognized. Following the generational accounting literature and trying to make our
analysis and figures more tractable we filtered all the data using an HP filter. Again, the filtering
does not influence the results of our analysis. After that, the relative age profiles were calculated
and recalculated to fit the actual budget data.24
21
Burcin B. and Kučera T. (2004).
22
Thanks to discounting, the present value of all variables beyond this period is negligible.
23
Bonin (1997) shows that using terms `Age-specific' and `Non-age-specific' could be misleading. We
acknowledge this argument, but continue using them because of their broad utilization.
24
For detailed information, see Appendix II ­ Age-Specific Taxes and Transfers
12 Kamil Dybczak
We are conscious of the fact that many important relations proposed by the economic theory are
neglected when constructing generational accounts. Nevertheless, we did not apply any
sophisticated projection method. Instead, we projected all net taxes using formula (4) presented in
the previous section. Once more, we would like to stress the role of generational accounts as a
ceteris paribus indicator of intergenerational imbalance and fiscal sustainability.
There is uncertainty about future productivity growth and the discount rate. Moreover, it is hard to
choose specific values for r and g. So, we introduced a set of both parameters into our empirical
analysis. This seems to be the standard approach to generational accounting in order to show the
sensitivity of the results to adjustment in the values of g and r. The value of r is influenced by the
government revenues and expenditure risk, which is hard to judge from today's perspective.25
In
the case of labour productivity growth we mainly took into account long-run factors and the
convergence of the Czech economy to the EU average. We calculated generational accounts for
current and future generations and the sustainability gap using variant g (0.01, 0.02, 0.03) and r
(0.03, 0.05, 0.07).
5.2.1 Revenues
Using the 2004 GFS methodology the total government revenues (expenditures) amounted to
CZK 1,062 (1,160) billion. The ratio of age-specific revenues (expenditures) to total revenues
(expenditures) is about 94 (87) %.26
For the empirical evaluation of the generational accounts, gathering the age-specific profiles of
taxes and transfers of both genders is necessary. Taxes and transfers are broken down into several
categories. First, public revenue and expenditure items, whose size depends on the number and
age of people, have to be identified. In the case of the Czech Republic the following revenue
items have been chosen:
Value Added Tax (VAT) (19.3%)27
Excises (E) (9%)
Personal Income Tax (PIT) (12.6%)
Social Security Contributions (SSC) (36.6%)
Inheritance Tax (IT) (1.4%)
Corporate Income Tax (CIT) (11.3%)
Other Age-Specific Revenues (OR) (3.7%)
Second, all public budget revenue items are assigned to individual age groups on the basis of the
Household Budget Survey 2002. The only exception is Corporate Income Tax, which is treated
like a tax on labour income (Personal Income Tax), i.e. the relative age profiles of both personal
and corporate income taxes are identical.28
The idea behind this argument is that the burden of
corporate income tax is ultimately carried mainly by employees, followed by consumers and
shareholders.
25
Lau (2000) applied a varying discount rate according to age for different agents.
26
For details see Appendix II ­ General Government Operations, 2004.
27
The number indicates the percentage of the total revenue.
28
Some working papers elaborate on Corporate Income Tax more sophisticatedly. See, for example, Auerbach
and Chang (2003) or see Cardarelli R., Sefton J. and Kotlikoff L. J. (1999) for details.
Generational Accounts in the Czech Republic 13
When inspecting the age-specific profiles we clearly see that the personal income tax and social
contributions paid by an individual depend on his/her age. It is evident that agents aged between
18 and 60 earn more than children and pensioners, so the direct taxes paid by this specific age
group are the highest. Since private consumption evolves in line with income, the same
conclusion holds for indirect taxes. Thus, value added tax and excises also depend heavily on the
age of the individual.
5.2.2 Expenditures
We found the following expenditure items to be age specific:
Old-Age Pensions (P) (19.9%)
Disability Pensions (DP) (4.2%)29
Unemployment Benefits (UB) (3.4%)
Education Expenditures (EE) (10%)
Health Expenditures (HE) (15.1%)
Sickness Benefits (SB) (2.1%)
Other Social Expenditures (OSE) (5.8%)
Other Age-Specific Expenditures (OE) (26.5%).
The data concerning all forms of pension benefits comes from the Czech Social Security
Administration database. The information on Education Expenditures was provided by the
Ministry of Education, Youth and Sports. The General Health Insurance Company provided the
health care data. As in the case of revenue, the remaining age-specific expenditure profiles were
obtained from the Household Budget Survey 2002.
It is assumed that Other Age-Specific Revenues and Other Age-Specific Expenditures are
distributed evenly over all age groups. First, in a few cases it is hard to even recognize if there is
any age-specific profile. Second, it is difficult to obtain all the profiles.
Our study shows that the largest part of age-specific expenditures is other age-specific
expenditures, i.e. with a flat age profile. This could appear unsatisfactory at first sight, but we
have to bear in mind that this item is the sum of expenditures on General Public Services,
Defence, Housing, Public Order and Safety. In our view it is impossible to quantify which age
group uses more/less of these public expenditures. So, for example, we assume that the level of
expenditure on defence depends on the size of the population, but not on its age structure.
29
Other forms of pension benefits (survivor's pensions) were assigned to old-age.
14 Kamil Dybczak
5.3 Government Purchases
Government purchases were quantified as a balance of non-age-specific expenditures and non-
age-specific revenues. The ratio of non-age-specific revenues (expenditures) to total revenues
(expenditures) is about 6.0 (12.9) %.30
We detected the following revenue items:
Property Income (2.5%)
Capital Revenue (1.1%)
Grants (2.4%)
and the following expenditure items:
Fuel and Energy (0.2%)
Agriculture and Forestry (2.5%)
Mining and Mineral Resources (0.2%)
Transport and Communications (10.0%)
not to be dependent on the number of people and their age. The absolute amount of Gt is
CZK 86 billion in 2004, i.e. the value of non-age-specific expenditures exceeds that of non-age-
specific revenues by CZK 86 billion in 2004.
5.4 Public Net Wealth and Net Debt
The last but not least item from the intertemporal budget constraint is government net wealth or
public net debt. There is no difference in applying either net wealth or net debt, but finding the
appropriate number is not as easy as it seems at first sight. Net wealth is defined as the part of
assets financed entirely by own resources. In other words it is a potential source of privatization
revenues. In fact, it is difficult to determine the actual market price of public assets.31
To
summarize, the evaluation of public assets is definitely not an easy task.
In the case of the Czech Republic the most important government assets are non-financial assets.
They comprise fixed assets such as roads, public buildings, land and so forth. Unfortunately, the
size and value of that public property has not been precisely specified in the Czech Republic yet.32
The key issue is whether and to what extent these fixed assets could be sold to raise lacking
revenues. In addition, it is hard to imagine that the government would sell all of its assets.33
30
For details see Appendix II ­ General Government Operations, 2004.
31
As an alternative, some authors try to estimate the market value of public net wealth as the sum of the present
value of the financial flows from public assets.
32
Public finances have been growing in deficit since 1995. Regardless of this unfavourable development, net
public wealth has been rising continually according to the CZSO. Government wealth is rising not because of
prudent government financial policy, but due to evolving accounting procedures at the CZSO with respect to the
recording of public assets.
33
To overcome this problem some authors estimate the value of government wealth that can be privatized. See,
for example, Gál R.I., Simonovits A., Szabó M. and Tarcali G. (2000).
Generational Accounts in the Czech Republic 15
In our view, government net wealth according to the national accounts overestimates the value of
property which can really be privatized. Unfortunately, no such estimate is available for the Czech
Republic. As a result, we define Dt as gross public debt less actual privatization revenues and less
the expected present value of future privatization revenues for the next few years.34
6. Results
Following the standard generational accounting methodology, we quantified the first set of
generational accounts for the Czech Republic. The analysis covers the entire public sector during
the period from 2004 to 2150. Because of the differences between the sexes we calculated the
generational accounts separately for males and females.
Following the structure of the theoretical part, the generational accounts of the currently living
agents were computed at the beginning. Consequently, they were applied when both the residual
and the sustainability approach were followed. Tables 1 and 2 show the present value of the
remaining lifetime taxes and transfers of a representative agent when labour productivity growth
is set to 2% and the discount rate to 5%. The different columns represent particular tax and
revenue items. Finally, the generational accounts of current generations are defined as the sum of
all columns in Tables 1 and 2.
Table 1: Generational Accounts and their Components for Females (2004, thousand CZK)
Age VAT E PIT SSC IT CIT OR P DP SD UB OSE EE HE OE GA2004
0 599 243 260 769 37 234 136 -368 -77 -62 -108 -260 -739 -483 -1298 -1117
5 660 281 301 891 42 271 135 -427 -89 -71 -125 -259 -760 -498 -1286 -933
10 690 304 326 963 46 293 127 -450 -95 -77 -136 -252 -591 -498 -1219 -571
15 720 333 356 1054 49 320 121 -478 -104 -85 -151 -242 -363 -506 -1155 -130
20 751 364 403 1196 54 362 118 -535 -117 -93 -159 -230 -134 -531 -1127 321
25 720 356 428 1275 54 384 111 -577 -125 -88 -140 -207 0 -530 -1059 602
30 673 339 438 1308 53 394 104 -640 -134 -75 -117 -182 0 -533 -997 631
35 640 329 440 1303 54 395 101 -751 -148 -66 -99 -156 0 -564 -970 508
40 583 308 403 1167 54 362 95 -846 -156 -58 -80 -118 0 -578 -912 224
45 529 282 337 940 53 303 89 -967 -157 -50 -60 -79 0 -591 -856 -227
50 459 240 245 656 49 220 81 -1085 -142 -36 -37 -51 0 -580 -779 -758
55 384 193 143 365 43 128 73 -1213 -115 -20 -13 -37 0 -559 -701 -1329
60 309 152 55 127 37 49 65 -1169 -92 -6 0 -29 0 -527 -620 -1649
65 244 120 12 19 29 10 56 -1005 -73 0 0 -25 0 -480 -531 -1624
70 192 93 0 0 22 0 46 -802 -54 0 0 -20 0 -410 -436 -1369
75 148 71 0 0 17 0 36 -598 -36 0 0 -13 0 -326 -342 -1043
80 112 53 0 0 13 0 27 -423 -21 0 0 -7 0 -248 -257 -752
85 80 38 0 0 10 0 19 -290 -12 0 0 -5 0 -183 -184 -527
90 55 26 0 0 7 0 13 -188 -8 0 0 -4 0 -131 -127 -355
95 39 18 0 0 5 0 9 -116 -6 0 0 -3 0 -92 -89 -233
100 16 7 0 0 2 0 4 -41 -3 0 0 -1 0 -37 -36 -90
Note: Value Added Tax (VAT), Excises (E), Personal Income Tax (PIT), Social Security Contributions
(SSC), Inheritance Tax (IT), Corporate Income Tax (CIT), Other Age-Specific Revenues (OR),
Old-Age Pensions (P), Disability Pensions (DP), Unemployment Benefits (UB), Education
Expenditures (EE), Health Expenditures (HE), Sick Benefits (SB), Other Social Expenditures
(OSE), Other Age-Specific Expenditures (OE).
34
The estimates of current and future privatization revenues come from the document: Projection of Revenues
and Expenditure in 2006. The document offers a rough estimate of privatization revenues in 2006 and 2007.
16 Kamil Dybczak
Table 2: Generational Accounts and their Components for Males (2004, thousand CZK)
Age VAT E PIT SSC IT CIT OR P DP SD UB OSE EE HE OE GA2004
0 572 231 361 1068 36 325 143 -358 -81 -68 -118 -262 -747 -526 -1363 -789
5 624 265 416 1230 41 374 140 -413 -93 -78 -134 -262 -760 -522 -1337 -509
10 642 283 444 1313 44 399 131 -426 -99 -84 -145 -248 -588 -501 -1248 -83
15 663 307 482 1425 47 433 122 -441 -106 -92 -159 -229 -359 -495 -1167 432
20 687 333 543 1611 51 488 117 -482 -118 -100 -167 -210 -132 -515 -1121 987
25 658 326 577 1716 51 518 109 -510 -124 -95 -147 -186 0 -521 -1043 1330
30 616 311 582 1729 50 523 102 -562 -134 -82 -124 -163 0 -541 -977 1331
35 592 307 567 1667 50 509 100 -670 -152 -71 -109 -143 0 -598 -953 1096
40 535 286 505 1449 49 453 92 -747 -162 -61 -89 -114 0 -621 -880 695
45 481 266 438 1210 48 393 85 -855 -170 -54 -70 -81 0 -648 -814 228
50 414 233 351 935 44 315 76 -956 -163 -44 -48 -52 0 -646 -725 -266
55 344 195 251 655 39 226 67 -1102 -141 -28 -23 -35 0 -634 -640 -826
60 273 155 140 362 33 126 58 -1186 -106 -11 0 -24 0 -599 -556 -1335
65 212 119 43 113 27 38 49 -1100 -77 0 0 -16 0 -545 -472 -1608
70 162 90 0 14 21 0 41 -899 -53 0 0 -9 0 -467 -387 -1488
75 122 68 0 0 14 0 32 -689 -33 0 0 -4 0 -376 -307 -1174
80 92 51 0 0 10 0 25 -515 -19 0 0 -3 0 -288 -238 -884
85 69 39 0 0 7 0 19 -377 -11 0 0 -2 0 -212 -179 -647
90 51 29 0 0 6 0 14 -255 -6 0 0 -2 0 -155 -132 -450
95 37 21 0 0 4 0 10 -156 -4 0 0 -1 0 -112 -96 -297
100 15 8 0 0 2 0 4 -51 -2 0 0 0 0 -44 -38 -107
Note: Value Added Tax (VAT), Excises (E), Personal Income Tax (PIT), Social Security Contributions
(SSC), Inheritance Tax (IT), Corporate Income Tax (CIT), Other Age-Specific Revenues (OR),
Old-Age Pensions (P), Disability Pensions (DP), Unemployment Benefits (UB), Education
Expenditures (EE), Health Expenditures (HE), Sick Benefits (SB), Other Social Expenditures
(OSE), Other Age-Specific Expenditures (OE).
The same, but aggregated, information is depicted in Figure 1. The horizontal axis represents the
age of the agent in 2004. The vertical axis depicts the average remaining lifetime net tax burden
(generational account) of each current generation. In other words, the vertical axis shows the
cumulated present value of all taxes and transfers which is paid by a representative agent of
different age between 2004 and the end of his/her life. To be more specific, the average male who
is 30 years old in 2004 will pay taxes and receive transfers for an additional 70 years. As a result
he accumulates a surplus whose present value is about CZK 1,331,000 in 2004. Put differently,
such a male on average pays CZK 1,331,000 more on taxes than he receives in benefits over the
rest of his life (between years 30 to 100), without taking into account previous taxes paid and
expenditures received (between years 0 and 29). By contrast, an average male at the age of 70 in
2004 accumulates a deficit of CZK 1,488,000 over the next 30 years, i.e. the government pays
him CZK 1,488,000 more than he pays in taxes (between years 70 and 100).
To help the reader get through all the numbers easily it is important to realize where all the
characteristics can be found. Since we are interested in comparing the accounts of current and
future generations, we only take into account generations that last a whole life cycle. In the case
of currently living generations there is only one possibility, i.e. we concentrate on the generation
which came into existence in 2004. The generational account of agents born in 2004 of both sexes
can be found in the first row and the last column of Tables 1 and 2 (-1117 and -789). Actually, the
last columns of Tables 1 and 2 are depicted in Figure 1. The overall generational account, which
neglects the differences between the sexes, is a weighted average of the generational accounts of
males and females (the dashed line). Since Tables 1 and 2 and Figure 1 show calculations based
on the growth rate set to 2% and the discount rate set to 5%, the same numbers can also be found
in Table 3.
Generational Accounts in the Czech Republic 17
Figure 1: Generational Accounts of Current Generations by Gender (2004, thousand CZK)
-2000
-1500
-1000
-500
0
500
1000
1500
2000
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99
ThousandsofCZK
Male Female Total
It is possible to draw some important conclusions using the tables and the figure. The significant
part of Figure 1 lies below zero. This means that the significant part of the current population gets
more from the public budget than it pays in taxes during its remaining lifetime. In other words,
only people aged approximately from 12 to 45 (in 2004) will produce a positive difference
between remaining lifetime taxes and transfers. By contrast, the rest of the population will
generate a deficit. If we take into account population ageing and the worsening age structure, the
current system of taxes and transfers looks unsustainable even when checking the figure visually.
The generational account of a representative agent who was born in 2004 is negative, i.e. the
agent will obtain more from the public budget than he/she will pay over his/her entire lifespan.
When the discount rate equals 5% and labour productivity growth equals 2%, the generational
account of a representative agent born in 2004 is CZK -948,000. In other words, each agent born
in 2004 will on average cumulate a lifetime deficit whose present value in 2004 is CZK -948,000.
If the government cannot finance these deficits using extra revenue sources, intergenerational
shifts of the fiscal burden are expected. So, even without quantifying the generational accounts of
future generations and the sustainability gap we can say that the current fiscal policy leads to an
intergenerational redistribution of the fiscal burden and should be changed.
The difference between the male and female generational accounts seems to be important. We
admit that addressing the differences between the sexes is not the main goal of our analysis.
Nevertheless, it is interesting to realize how differences in position on the labour market,
consumption behaviour etc. can influence the sustainability of public finances. Figure 1 shows
that the average man born in 2004 accumulates a lifetime deficit lower than that of the average
woman by almost CZK 330,000 in terms of the year 2004.
When building generational accounts, we explicitly assume that age- and gender-adjusted absolute
per capita taxes and transfers grow in relation to labour productivity growth. Moreover, to make
the different generational accounts comparable we have to discount future values to the base year
18 Kamil Dybczak
2004. Thus, the present value of future taxes and transfers depends heavily on the size of the
discount rate and the labour productivity growth rate.35
Introducing different values of the two key
parameters affects the results as shown in Table 3.
Table 3: Generational Accounts of Current and Future Generations under Different Scenarios
(thousand CZK)
g (%) 1 2 3
r (%) 3 5 7 3 5 7 3 5 7
GA current -1081 -902 -862 -1497 -948 -883 -2629 -1090 -904
GA future 2761 2021 1682 4655 2910 2122 8534 4512 2849
Sustainability gap (%GDP) 454 211 131 797 297 131 1608 460 214
When testing the sensitivity of fiscal sustainability with respect to g and r, we found the following
conclusions. Increasing productivity growth leads to the gap between public expenditures and
revenues broadening.36
Putting it simply, both taxes and transfers are indexed by the same
measure. So the gap, whether positive or negative, grows at the same rate if the structure and size
of the population are not changing. Unfortunately, in the case of the Czech Republic the gap is
negative, and demographic development will make the situation even worse.
The higher the discount rate the lower the generational account of current generations. The same
conclusion applies to the size of the generational account of future generations and to the
sustainability gap. Since the discount rate is used to translate future values into present terms, a
higher r improves the current value of future deficits.
In all cases of different g and r the present value of the net tax burden of a representative agent is
negative, i.e. this agent obtains more transfers than pays in taxes over his/her whole lifetime. By
contrast, the generational accounts of future generations, calculated using the residual approach,
are positive. This implies that next generations will face the opposite situation to currently living
generations from the tax and transfer point of view. The higher generational account of future
generations indicates that the present fiscal policy is not sustainable and should be changed.
If the structure of public revenues and expenditures is held fixed and the demography develops in
accordance with our projection, we estimate the sustainability gap to be positive regardless of the
combination of g and r. The sustainability gap indicates the size of the adjustment needed to
achieve fiscal sustainability, i.e. it is defined as the accumulated present value of future deficits
owing to changes in demography parameters and unchanged fiscal policy between 2004 and
2150.37
For example, if the discount rate equals 5% and productivity grows at 2%, the government
accumulates debt of 297% of 2004 GDP between 2004 and 2150, as presented in Table 3. If g
increases by just 1 percentage point to 3%, the ratio of the sustainability gap to GDP rises to
460% ceteris paribus. It seems that indexation of taxes and benefits is an important factor for the
potential development of public finances.
35
The problems of choosing g and r are discussed in section 5.2.
36
The sentence holds if revenues and expenditures are strictly indexed on labour productivity growth. Under this
condition and applying our approach we could say that productivity growth does not help. But we have to be
cautious. It is tempting to say that this paper finds the current fiscal policy settings to be unsustainable when
indexed to productivity growth. Again we have to stress that our approach lacks the reaction of the rest of the
economy to fiscal policy and vice versa.
37
The level of the sustainability gap is presented in relation to GDP.
Generational Accounts in the Czech Republic 19
Since the beginning of the 1990s generational accounts have been constructed for many countries
all over the world. To give the reader some idea about the situation in other countries we present
part of the results from Auerbach, Kotlikoff and Leibfritz (1998) and Gál, Simonovits, Szabó and
Tarcali (2000).38
All the results are calculated setting g to 1.5% and r to 5%.
Table 4: Sustainability Gaps in Different Countries (% of GDP)
Baseline
scenario
No Demographic
Change
Zero Initial
Debt
United States 159 22 97
Japan 337 77 309
Germany 156 -8 81
Italy 223 18 98
Sweden -31 -67 -45
Belgium 107 63 -218
Hungary 424 119 384
Czech Republic 248 152 226
Note: In the case of the Czech Republic the base year is set to 2004. The rest of the data relates to 1995.
Comparing the results on the sustainability gap to GDP in Table 4 for different countries, we can
draw the following conclusions. First, The No Demographic Change scenario indicates how large
the sustainability gap would be if the size and structure of the population remain stable. Table 4
demonstrates that changing demography seems to be a significant factor which negatively affects
the intergenerational imbalance in all the countries. Second, leaving aside the impact of public
debt alleviates the intergenerational imbalance. But its extent, except in the case of Belgium,
appears to be substantially smaller than that of changing demography. The equivalent outcome
holds in the case of the Czech Republic, i.e. the impact of changing population size and structure
exceeds the impact of zero initial debt. Third, in the case of the Czech Republic the difference
between the Baseline scenario and the No Demographic Change value seems to be smaller. It
appears that there are other important factors in addition to worsening demographic conditions. As
already mentioned, the intergenerational imbalance would not disappear with higher labour
productivity growth. This indicates that the system of taxes and transfers in the Czech Republic
faces structural problems, i.e. under the current set-up of public revenues and expenditures the
system of public finances is predetermined to generate deficit financing.39
In addition, the impact
of demographic factors aggravates the fiscal/ intergenerational imbalance.
To sketch the potential impact of intentional adjustments in taxes and transfers, we present
mechanistic simulations of the impact of a variation in selected age-specific profiles on
intergenerational redistribution and fiscal sustainability. On the revenue side a 10% increase in the
age-specific profile of value added tax (VAT) and personal income tax (PIT) is introduced. On the
expenditure side a 10% decrease in the age-specific profile of old-age pensions (P) and health
expenditures (HE) is introduced. In other words a representative agent will pay/obtain 10%
38
We are conscious of the fact that the generational accounts methodology is not unified. In addition, the results
concerning countries other than the Czech Republic are almost ten years old. This means that important changes
relating to demography and fiscal policy could have occurred since that time.
39
Even if no negative demographic factors come into effect. See, for example, Bezdek, Dybczak and Krejdl
(2003).
20 Kamil Dybczak
more/less in absolute terms compared to the baseline scenario.40
The results are presented in Table
5. Indeed, all of the presented scenarios improve the intergenerational imbalance and fiscal
sustainability indicators. The improvement appears to be significant, but not sufficient. The
combination of all the refinements reduces the ratio of the sustainability gap to GDP by almost
100 percentage points. This is still not enough to solve the problems of intergenerational
redistribution and fiscal sustainability. We should stress again the pure mechanistic nature of these
results.
Table 5: The Impact of a 10% Adjustment in Taxes and Transfers (thousand CZK)
Baseline  VAT  PIT P HE TOTAL
GA current -948 -889 -917 -912 -897 -771
GA future 2910 1613 1673 1535 1604 1079
Sustainability gap (%GDP) 297 275 284 269 274 204
Finally, Table 6 presents information about the impact of changing demographic factors on the
generational accounts of future agents. The results indicate the present value of the growth-
adjusted net taxes of a representative future agent which guarantees fiscal sustainability.41
According to our calculations, it is evident that the generational account of the future agent
increases over time in the case of the Czech Republic. Moreover, if no changes in taxes and
transfers are undertaken, the per capita burden of future agents necessary to restore fiscal
sustainability will almost double during the next 15 years.
Table 6: Growth-Adjusted Generational Accounts of Future Generations in Different Years
(thousand CZK)
2004 2009 2014 2019
GA future 1782 2265 2845 3531
base year=100 100 127 160 198
The timing of fiscal reform is therefore a very important factor from the intergenerational point of
view, since the population is getting smaller and older. In other words, the number of people
really facing the burden accumulated by previous generations is decreasing. This implies that the
government should not hesitate too long with revising the current system if it wishes to sustain
fiscal policy without dramatic changes in taxes and transfers of future generations. The costs of
delayed action seem to be considerable.
40
As well as in most of the presented results g=2% and r=5%.
41
The results are calculated by applying the residual approach. For details see section 4.
Generational Accounts in the Czech Republic 21
7. Conclusions
We have presented the first set of generational accounts for the Czech Republic. By contrast with
traditional indicators such as the budget deficit and public debt, generational accounts are forward
looking and provide us with information about potential intergenerational redistribution and the
sustainability of public finances. The generational accounting approach captures sustainability
from both the aggregated macroeconomic and representative agent's point of view.
We show that the present fiscal policy is not sustainable, owing to the unequal treatment of
current and future representative agents. According to our analysis a representative living agent
born in 2004 obtains more benefits than he/she pays in taxes over the rest of his/her life. By
contrast, a representative agent not yet born will face the opposite situation. Moreover, the total
amount of government liabilities resulting from the current fiscal policy pursued to 2150 reaches
about 300% of GDP in 2004. Thus, taking into account future demographic development and a
strict indexation rule, fiscal policy appears to be unsustainable. Finally, according to our results,
the costs of postponed modification of taxes and benefits seem to be considerable, because of the
worsening demographic factors.
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KOTLIKOFF L. J. AND LIEBFRITZ W. (1998): "An International Comparison of Generational
Accounts". NBER WP6447.
LAU M. I. (2000): "Generational Accounting and Individual Discount Rates". CEBR WP 7.
LEVY J. AND DORÉ O. (1998): "Generational Accounting for France". IMF WP 98/14.
RAFFELHÜSCHEN B. (1999): "Generational Accounting in Europe". Directorate-General for
Economic and Financial Affairs, Study N6.
RELE TER H. (1997): "Generational Accounts for the Dutch Public Sector". CPB, Research
memorandum No. 135.
Generational Accounts in the Czech Republic 23
Appendix I
General Government Operations, 2004 (GFS 1986 Methodology)
(billions of CZK)
TAX REVENUE 963 General Public Services 78
Income Profits & Capital Gains Tax 253 Defense 51
Individual 133 Public Order & Safety 39
Corporate 120 Education 116
Social Security Contributions 388 Health 175
Taxes on Property 15 Social Security & Welfare 356
Domestic Taxes On Goods & Services 302 old age pension 231
General Sales, Turnover & Value-Added Taxes 182 sick benefits 25
Excises 96 social security benefits 33
Taxes on Special Services 1 other benefits 43
Taxes on Use of Goods & Services 16 passive employment policy 7
Other Taxes on Goods & Services 7 welfare 15
Taxes on International Trade & Transactions 4 Other 10
Import Duties 4 Housing & Community Amenities 84
Other Taxes 0 Recreation, Cultural & Religious Affairs & Services 30
NONTAX REVENUE 62 Fuel and Energy 3
Entrepreneurial & Property Income 27 Agriculture, Forestry, Fishing and Hunting 29
Administrative Fees & Charges, Nonind.and
Incidental Sales 24
Mining & Mineral Resources, Manufacturing &
Construction 3
Fines & Forfeits 4 Transportation & Communication 116
Other Nontax Revenue 7 Other Economic Affairs & Services 36
CAPITAL REVENUE 12 Other Expenditures 45
GRANTS 25
TOTAL REVENUE 1 062 TOTAL EXPENDITURE 1 160
DEFICIT -98
DEBT 659
Age Specific Revenue 998 Age Specific Expenditure 1 010
Income Profits & Capital Gains Tax 253 General Public Services 78
Social Security Contributions 388 Defense 51
Taxes on Property 15 Public Order & Safety 39
Domestic Taxes On Goods & Services 302 Education 116
Taxes on International Trade & Transactions 4 Health 175
Other Taxes 0 Social Security & Welfare 356
Administrative Fees & Charges 24 Housing & Community Amenities 84
Fines & Forfeits 4 Recreation, Cultural & Religious Affairs & Services 30
Other Nontax Revenue 7 Other Economic Affairs & Services 36
Other Expenditures 45
Non-age specific revenue 64 Non-age specific expenditure 150
Entrepreneurial & Property Income 27 Fuel and Energy 3
Capital Revenue 12 Agriculture, Forestry, Fishing and Hunting 29
Grants 25 Mining & Mineral Resources, Manufacturing & Cons 3
0 0 Transportation & Communication 116
TOTAL REVENUE 1 062 TOTAL EXPENDITURE 1 160
24 Kamil Dybczak
Appendix II
Age-Specific Taxes and Transfers (thousand CZK)
The major part of the age-specific profiles of a representative male and female were calculated
using the Household Budget Survey 2002 provided by the Czech Statistical Office. Data
concerning all forms of pension benefits comes from the Czech Social Security Administration
database. Data reflecting Education Expenditures was provided by the Ministry of Education,
Youth and Sports. Finally, the General Health Insurance Company provided the health care data.
The presented age-specific taxes and transfers give us an idea of people's behaviour during their
lifecycle. Moreover, we can infer from their level and shape how people contribute to the public
budget or benefit from public transfers depending on their age. For example, the amount of direct
taxes (Personal Income Tax and Social Security Contributions) depends on an individual's wage
rate and employment. First, in the neoclassical framework, the real wage rate is a function of
labour productivity. Many factors can influence the productivity of labour, but we assume it
depends mainly on the stock of human capital accumulated by an employee, i.e. experience
accumulated over time. Generally, young people increase the stock of their human capital more
easily than older people. Moreover, the stock of capital depreciates over time, and if no new
experience is added the capital stock decreases. This implies that an employee becomes less
productive and his/her real wage rate potentially falls. Usually, older people are not capable of
adjusting to new conditions and their stock of human capital just decreases due to depreciation. In
other words, the real wage rate seems to depend on the age of the employee, i.e. it increases with
age for the young and decreases for the old. Second, people start working after finishing at least
the statutory level of education. Usually, they stop working after reaching retirement age. Thus,
when applying the provided arguments the shape of the age-specific profiles of direct taxes can be
explained. It follows that the amount of personal income tax and social security contributions paid
by an individual depends on his/her age.
The shape of the age-specific profiles of indirect taxes can be explained as follows. The
consumption of a representative agent develops according to his/her needs and the level of his/her
income. As a result, the amount of indirect taxes (VAT and Excises) is either low or zero for
children. Then, as income increases, the amount of goods consumed increases, as does the amount
of indirect taxes. Finally, as an agent retires, he/she starts consuming accumulated savings and
lowers consumption.
The government redistributes income among individuals using public expenditures and transfers.
In many cases public expenditures and transfers depend on the size and age structure of the
population. It follows that age-specific profiles of different public expenditure items can be
constructed as well. For example, the government provides retired people with old-age pensions.
If an individual does not reach a certain age, he/she cannot consume these pensions. By contrast,
the government finances a substantial part of education expenditures, but after reaching a specific
age, an individual has to finance education by himself. Next, government health expenditures are
affected by the sickness rate of different age groups. Usually, the government pays more for
children and old people, since their sickness rate is higher than that of people of productive age.
Generational Accounts in the Czech Republic 25
VAT
0
10
20
30
40
50
60
70
80
90
100
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
EXCISES
0
10
20
30
40
50
60
70
80
90
100
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
PERSONAL INCOME TAX
0
10
20
30
40
50
60
70
80
90
100
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
26 Kamil Dybczak
SOCIAL SECURITY CONTRIBUTIONS
0
10
20
30
40
50
60
70
80
90
100
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
INHERITANCE TAX
0
10
20
30
40
50
60
70
80
90
100
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
CORPORATE INCOME TAX
0
10
20
30
40
50
60
70
80
90
100
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
Generational Accounts in the Czech Republic 27
OTHER AGE-SPECIFIC REVENUES
0
10
20
30
40
50
60
70
80
90
100
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
OLD-AGE PENSION
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
DISABILITY PENSION
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
1000CZKperperson
Male Female
28 Kamil Dybczak
UNEMPLOYMENT BENEFITS
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
1000CZKperperson
Male Female
OTHER SOCIAL BENEFITS
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
SICK BENEFITS
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
Generational Accounts in the Czech Republic 29
EDUCATION EXPENDITURES
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
HEALTH EXPENDITURES
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
OTHER EXPENDITURES
-120
-110
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
1 8 15 22 29 36 43 50 57 64 71 78 85 92 99
1000CZKperperson
Male Female
CNB WORKING PAPER SERIES
2/2006 Kamil Dybczak: Generational accounts in the Czech Republic
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Inflation targeting: To forecast or to simulate?
CNB ECONOMIC RESEARCH BULLETIN
November 2005 Financial stability
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May 2004 Inflation targeting
December 2003 Equilibrium exchange rate
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