Three takes on sustainability

Juha Honkatukia

No P58, Research Reports from VATT Institute for Economic Research

Abstract: Ageing of the population causes a two-fold problem for the sustainability of public finances. It tends to increase public expenditure on age-related services and the demand for labor in the sectors providing these services at the same time as it causes labor supply to stagnate or even fall, as the case may be in Finland. All of these effects exert a pressure on public finances and sustainability. Tackling the problem is not easy, since it boils down to raising extra revenue and creating incentives for the labor supply to expand simultaneously. This poses challenges for re-evaluating the entire tax structure and other sources of funding for the social security and pension systems. The analysis of these complex problems requires the use of numerical models. This book studies the roles of taxation, pension funds, as well as the central and local governments from the points of view of sustainability and efficiency with the help of three different numerical, general equilibrium models. We find that increasing the efficiency of taxation via tax reforms may help in improving sustainability. However, raising the required extra funding may aggravate the supply side problem. To boot, the uncertainties associated with aging itself may call for precautionary setting of stringent sustainability targets.

Keywords: Economic growth; Taloudellinen kasvu; Public services; Julkiset palvelut; Taxation; Verotus; Policy analysis and modelling; Päätöksenteon tuki ja mallintaminen (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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