Fiscal Space under Demographic Shift

Christine Ma and Chung Tran

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: In this paper we quantitatively explore implications of ageing demographic structure for government revenue raising capacity through lens of fiscal space. We base our analysis on dynamic general equilibrium, overlapping generations model calibrated to data from Japan and USA.We first map out fundamental-based fiscal limit using the Laffer curve approach, and then compute fiscal space in terms of budgetary room between the current revenue and the maximum revenue defined by the peak of Laffer curves. We demonstrate that the evolution of underlying demographic structures plays an important role in shaping a country’s fiscal limit and fiscal space. There will be significant contractions in fiscal space in Japan and USA when the two countries enter their late stage of demographic transition in 2040. In particular, the results from the model calibrated to Japan indicates that an increase in old-age dependency ratio to over 70 percent can reduce Japan’s fiscal space by 36 percent. When factoring in the increased fiscal cost of existing commitments to the age pension program, the net fiscal space for Japan turns negative.

Keywords: Population Ageing; Laffer Curve; Fiscal Limit; Sustainability; Heterogeneity; Dynamic General Equilibrium. (search for similar items in EconPapers)
JEL-codes: E62 H20 H60 J11 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-age, nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Fiscal Space under Demographic Shift (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2016-642

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