The dynamic fiscal effects of demographic shift: The case of Australia

Abstract

a b s t r a c t a r t i c l e i n f o Available online xxxx JEL classification: H2 J1 C68We develop a small open economy, overlapping-generations model that incorporates non-stationary demographic transition paths to study the dynamic fiscal effects of demographic shift in Australia. Since the recent ageing of Australia's population is projected to exacerbate over the coming decades, there are potentially significant macroeconomic implications and impacts on fiscal commitments for old-age related expenditures. To investigate these implications and fiscal impacts, our model pays special attention to Australia's taxation and retirement schemes, to the age structure of government expenditures, and to population dynamics via fertility, longevity and immigration. Our simulation results demonstrate that population ageing shifts the tax base from labour income towards asset income and consumption, and substantially increases old-age related government expenditures. Significant future adjustments in other government expenditures and taxes will be required to finance these expenditures. Interestingly, the main driving factor behind increased fiscal costs is the increase in survival, not the decline in fertility, rates. Increases in fertility and immigration are not effective solutions to such fiscal challenges.

Secular Stagnation: Determinants and Consequences for Australia

“…Global market 41 This is not to belittle fiscal policy in its other roles. Kudrna et al (2015) provide convincing evidence that ageing in the Australian context has very strong implications for the size and composition of Australian government spending in the coming decades. integration, particularly since the demise of the Bretton Woods agreement in the early 1970s, is one clear contributor, since saving in the advanced economies has since been able to finance investment in low-wage economies, earning high rates of return in the form of dividends now readily returned to the wealthy in advanced economies.…”

“…By virtue of its traditionally high rate of immigration it suffers less from the demographic contractions in some parts of Europe and Japan. Nonetheless it is at one with these regions in facing the prospect of accelerating health costs associated with higher survival rates (Australian Treasury, 2010; Kudrna et al, 2015).…”

“…Kudrna et al . () provide convincing evidence that ageing in the Australian context has very strong implications for the size and composition of Australian government spending in the coming decades.…”

Demographic transition and asset prices: Evidence from developing countries

“…If ageing affects asset prices, investors in matured economies may shift their assets to economies with younger demography in anticipation of higher returns until expected returns equalize. Kudrna, Tran, and Woodland (2015) use a small open economy model for studying the economy-wide effects of demographic shift. 5 It has also been argued that housing prices provide better empirical relationship with demography than financial asset prices as capital flows are less likely to dilute the link between ageing and housing prices (Takats, 2010).…”

Introduction: A multidisciplinary approach to ageing

“…These accounts now span many countries, and provide powerful new bases for understanding the public and private consequences of population ageing in Australia as contrasted with comparable populations and economies. Further, a range of economywide modelling initiatives aim to inform policy formulation on the impacts of an ageing demographic on retirement incomes and pension reform (for example, Kudrna, Tran and Woodland 2015). The interplay between pension accumulations, tax treatment, public transfers and aggregate fiscal balance is complex, because both labour supply and saving behaviour (and further human capital accumulation) are affected by policy change.…”