Population Ageing, Economic Growth and the Composition of Government Expenditure

Andreas Irmen, Maria Krelifa () and Johanna Kuehnel ()
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Maria Krelifa: DEM, Université du Luxembourg
Johanna Kuehnel: University of Heidelberg, DE

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper investigates how population ageing affects economic growth by altering the composition of government expenditure. We develop and test an original political economy model in which an aging population shifts the preferences of the median voter, leading to increased elderly spending at the expense of private investment, thus reducing growth. The model yields three predictions: population ageing (i) raises elderly spending (as a share of output); (ii) does not significantly affect productive expenditure; and (iii) lowers economic growth. Using OECD data from 2007-2018 and both OLS and IV regression analyses, we find strong support for prediction (i): population ageing significantly increases spending on “old age” and “hospital services.” Consistent with (ii), there is no significant impact on “tertiary education,” “transport,” “communication,” or “R&D.” Finally, using GMMbased estimation with a broader sample of 178 countries, we confirm prediction (iii): healthcare expenditure negatively affects growth.

Keywords: "ageing; demographics; endogenous economic growth; generalised method of moments; government spending; median voter." (search for similar items in EconPapers)
JEL-codes: D72 E62 H40 J10 O40 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-age and nep-gro
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:25-15

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