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

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  • Kudrna, George
  • Tran, Chung
  • Woodland, Alan

Abstract

We 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.

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  • Kudrna, George & Tran, Chung & Woodland, Alan, 2015. "The dynamic fiscal effects of demographic shift: The case of Australia," Economic Modelling, Elsevier, vol. 50(C), pages 105-122.
    • Handle: RePEc:eee:ecmode:v:50:y:2015:i:c:p:105-122
    DOI: 10.1016/j.econmod.2015.05.010
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    Cited by:

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    3. Christine Ma & Chung Tran, 2016. "Fiscal Space under Demographic Shift," ANU Working Papers in Economics and Econometrics 2016-642, Australian National University, College of Business and Economics, School of Economics.
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    8. Gong, Xiao-Li & Liu, Xi-Hua & Xiong, Xiong & Zhuang, Xin-Tian, 2019. "Non-Gaussian VARMA model with stochastic volatility and applications in stock market bubbles," Chaos, Solitons & Fractals, Elsevier, vol. 121(C), pages 129-136.
    9. Georges, Patrick & Seçkin, Aylin, 2016. "From pro-natalist rhetoric to population policies in Turkey? An OLG general equilibrium analysis," Economic Modelling, Elsevier, vol. 56(C), pages 79-93.
    10. Andrew Binning & Susie McKenzie & Murat Özbilgin & Christie Smith, 2024. "New Zealand demographics and their role in an overlapping generations model," Treasury Analytical Notes Series an24/08, New Zealand Treasury.
    11. Mateo Zokalj, 2016. "The impact of population aging on public finance in the European Union," Financial Theory and Practice, Institute of Public Finance, vol. 40(4), pages 383-412.
    12. Kudrna, George & Tran, Chung, 2018. "Comparing budget repair measures for a small open economy with growing debt," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 162-183.
    13. Ian M. McDonald, 2020. "The Economics of Ageing—What Do We Face?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(4), pages 586-597, December.
    14. Kudrna, George & Tran, Chung & Woodland, Alan, 2019. "Facing Demographic Challenges: Pension Cuts Or Tax Hikes?," Macroeconomic Dynamics, Cambridge University Press, vol. 23(2), pages 625-673, March.
    15. Marchiori, Luca & Pierrard, Olivier, 2017. "How does global demand for financial services promote domestic growth in Luxembourg? A dynamic general equilibrium analysis," Economic Modelling, Elsevier, vol. 62(C), pages 103-123.
    16. Zhou, Rui & Li, Johnny Siu-Hang & Tan, Ken Seng, 2015. "Modeling longevity risk transfers as Nash bargaining problems: Methodology and insights," Economic Modelling, Elsevier, vol. 51(C), pages 460-472.
    17. George Kudrna & Chung Tran, 2015. "Budget Repair Measures: Tough Choices for Australia's Future," ANU Working Papers in Economics and Econometrics 2015-628, Australian National University, College of Business and Economics, School of Economics.
    18. Thomas Davoine, 2023. "The joint macroeconomic impacts of capital markets integration and fertility," Review of International Economics, Wiley Blackwell, vol. 31(2), pages 687-720, May.
    19. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 713-780, Elsevier.
    20. Grace Taylor & Rod Tyers, 2017. "Secular Stagnation: Determinants and Consequences for Australia," The Economic Record, The Economic Society of Australia, vol. 93(303), pages 615-650, December.
    21. Davoine, Thomas, 2022. "Cross-country differences in the long-run economic impacts of increased fertility," IHS Working Paper Series 38, Institute for Advanced Studies.
    22. Cross, Jamie & Poon, Aubrey, 2016. "Forecasting structural change and fat-tailed events in Australian macroeconomic variables," Economic Modelling, Elsevier, vol. 58(C), pages 34-51.

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    More about this item

    Keywords

    Demographic transition; Ageing; Overlapping generations; Dynamic general equilibrium; Fiscal policy;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J1 - Labor and Demographic Economics - - Demographic Economics
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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