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The Social Expenditures Model

The use of an analytical structure of monitoring and forecasting models integrated together and in turn integrated with medium and long-term prediction models allows the RGS, within the framework of its institutional tasks, to carry out monitoring and forecasting activities of aggregates for social benefit expenditure in cash and healthcare spending of Public Administrations' economic accounts.

The specific objective of the aforementioned system of models is to process information - even heterogeneous and of different origin - in order to unify expenditure trend monitoring activities and evaluate the conformity of actual trends to those provided by Public Administration accounting, by analysing the reasons for any deviations. To this end, it was necessary to supplement the cash trend analysis with the detection of other financial and structural elements.

Specifically, this instrument, developed and managed by the Inspectorate General for Social Expenditure (IGeSpeES), aims to:

  1. monitor social benefit trends, and check it corresponds to the forecasts in the course of the year;
  2. analyse the structural data underlying the financial dynamics (number and average amount of benefits, etc.) in order to measure the contribution of the main explanatory factors;
  3. reconstruct the results of the monitored variables at the end of the year;
  4. integrate financial and structural data historical time series, once these have been verified on the basis of final data provided by the organisations that provide the benefits;
  5. prepare forecasts of the main social expenditures components for the purposes of preparing the P.A. account contained in the set of public finance documents (Quarterly Cash Report, DPEF, RPP, update document of the Italian Stability Programme, etc.);
  6. establish a sufficiently analytical historical and forecasting database, with financial and structural data, in support of pre-legislative assessment activities.

The aggregates subject to monitoring and forecasting are represented by the expenditure for social benefits in cash and the healthcare spending in the PA economic account.

Cash expenditure on social benefits can be further disaggregated into expenditure for pensions and other social benefits in cash. This second aggregate includes a heterogeneous set of benefits in terms of purpose and types of needs addressed and aggregated as non-pension monetary benefits. There follows a more accurate description of the definition and content of the social expenditure components indicated above which consistently corresponds to the first level structure of the instrument designed for the monitoring and forecasting task.

The definition of public expenditure for pensions adopted for the purposes of monitoring is the same as that inferred from the forecasts contained in the short- and medium-long term public finance documents compiled at national level and within the scope of the EPC-WGA (Economic Policy Committee of the ECOFIN Council). The aggregate includes the entire mandatory public system and social pension expenditure (social benefits cleared after 1995). The first of these components affects all pensions granted on the basis of a contributory requirement that is generally age-related. The second component was included because it is closely related to population ageing. Indeed, in addition to earnings requirements, the right to a social pension (or social allowance) is not granted before the age of 65. From an institutional point of view, the expenditure from the compulsory pensions system includes invalidity pensions, old age and survivors' pensions granted by INPS and INPDAP and other pension funds that are not managed by the two institutes.

Consistently with the definition adopted by the forecasts contained in the public finance documents, spending on other social benefits in cash subject to monitoring includes a set of items that are heterogeneous in terms of the function performed. However, they share the common feature of being non-pension cash benefits.

Public spending for healthcare adopted for monitoring purposes corresponds exactly to the definition of total current expenditure of the consolidated economic account of the healthcare sector, within the Social Protection accounts. This definition includes both healthcare costs in the strict sense and an estimate of the depreciation of public healthcare investment undertaken over time. With regards to the first component, the expenditure relating to benefits subject to the participation of users is counted for the residual value at the expense of the public healthcare system.

The methodological approach taken provides for:

  1. developing analytical forecasts consistently with the complexity and variety of characteristics of the regulatory-institutional context (which often undergoes transition periods also according to current regulations);
  2. optimising the use of the information derived from monitoring activities for forecasting purposes;
  3. ensuring an explicit and consistent link between the forecast expenditure trends and that of the structural variables which condition and explain their dynamics;
  4. implementing, for the forecast period, a coherent information system, consisting of structural and financial variables, that may be of cognitive support to subsequent evaluations in the context of pre-legislative activities.

Medium and long-term models provide forecasts over an approximate 50-year time horizon. They consist of a specific regulatory-institutional module for each expenditure function (pensions, healthcare, and other social benefits in cash and the share the same demographic and macroeconomic paradigm. The shared demographic and macroeconomic paradigm makes these models perfectly consistent and integrated.

The regulatory-institutional module is designed to manage the information available with a high level of detail. This provides for: a) an accurate reproduction of the rules laid down by the legislation in force both in the transitional phase and under standard arrangements; b) the ability to simulate a wide range of regulatory changes; c) full integration with the corresponding short-term models.

The demographic module can issue forecasts as a function of different hypotheses about demographic parameters (fertility, mortality and migration flows). Further, it can make forecasts perfectly consistent with those officially produced by Istat (used in national scenarios) and by Eurostat (used in forecast exercises in the European context), where the demographic parameters below are available with an appropriate level of detail.

The labour market module adopts a generational approach to the projection of activity rates. It is designed to integrate the underlying dynamics (inertial component) with the hypothetical scenario defined exogenously at national and European level.

The modules are mutually interrelated, resulting in significant endogenous dynamics.

In this regard, it is worth pointing out the revision of the transformation coefficients of the contribution system on the basis of the probability of death underlying demographic dynamics and the interrelationship of activity rates with: a) the requirements for access to retirement; b) the relationship between age and contributive seniority of insured persons with regards to the pension system; c) schooling rates; d) the evolution of the working-age population.

Medium to long-term models of pension and healthcare spending are updated annually. The forecasts are processed at the same time intervals, concurrently with the preparation of the DPEF and Update Document of the Stability Programme. These models are used for the preparation of sensitivity forecasts and simulations in the context of the Working Group on Population Ageing constituted at the Economic Policy Committee of the ECOFIN Council (EPC-WGA). These projections are made on the basis of scenarios defined according to homogenous criteria within the framework of the European Union countries. This also makes it possible to compare the effects on public finances of the common population ageing process and the effect of containment resulting from reform interventions, if any.

The national and EPC-WGA scenario-based medium to long-term forecasts are discussed in greater detail in an annual report published by the RGS.