Bell, William Paul (2005): An evaluation of policies to reduce fiscal pressure induced by population ageing in Australia.
Download (1209Kb) | Preview
Population ageing increases fiscal pressure by increasing the aged to working-age ratio, which simultaneously reduces the growth in government revenue and increases government social outlays. This study evaluates proposed tax and economic growth policies to meet the population ageing induced fiscal pressure in Australia.
The research in this thesis attempts to clarify inconsistencies between these policy proposals.
The literature indicates there are currently two contrasting tax policies recommended to cope with the fiscal pressure induced by an ageing population. The first recommendation known as a ‘pay as you go’ policy (PAYGP) involves progressively increasing taxes to meet increases in fiscal pressure. The second proposal is for a reduction in taxes or ‘tax-cut policy’. It is part of the government’s current policy mix to meet the fiscal pressure, along with an economic growth policy, and no cuts in government services. This study assesses the compatibility of a growth policy to reduce fiscal pressure and a tax-cut policy to increase economic growth. In addition, the proposition that growth in after-tax GDP per capita will continue to overwhelm any tax increases under a PAYGP is assessed under more stringent conditions.
Sensitivity analysis on a simulation model is used to investigate the effect of the tax and the economic growth policies on fiscal pressure and after-tax GDP per capita. This simulation model is based upon the Productivity Commission’s (2005a) model. Fiscal pressure sensitivity analysis investigates: increases in the labour force participation rate (LFPR) and the retirement age; changes in the labour productivity growth rate (LPGR); changes in the mortality, net overseas migration, and total fertility rates; and changes in the tax rate as a percentage of GDP. A ‘Tax elasticity of the labour supply’ (TELS) is used to simulate the disincentive/incentive effects of increases/decreases in the tax rate. The ‘After-tax GDP per capita’ sensitivity analysis investigates the PAYGP by measuring sensitivity to the LPGR and the TELS.
Analysis of the policy proposals resulted in the following conclusions. A tax-cut policy to increase the LFPR and LPGR is counterproductive in reducing fiscal pressure but sustainable during the demographic gift phase of population ageing. The PAYGP remains workable with continued growth in after-tax GDP per capita even at a low LPGR and high TELS values. A PAYGP has a greater growth in after-tax GDP per capita than a non-PAYGP with a slightly lower LPGR. Productivity policies to increase the LPGR are ineffective at reducing fiscal pressure but enhance a PAYGP. Participation policies to increase the LFPR and the retirement age are very effective at reducing fiscal pressure. Population policies are only slightly effective or ineffective in reducing fiscal pressure. A suitable policy mix to meet the fiscal pressure includes participation policies to increase the LFPR and a PAYGP enhanced with productivity policies to increase the LPGR to cover the remaining fiscal pressure
|Item Type:||MPRA Paper|
|Original Title:||An evaluation of policies to reduce fiscal pressure induced by population ageing in Australia|
|Keywords:||Population Ageing; Australia; superannuation; pensions; demographic change; simulation; fiscal pressure; analysing policies;labour force participation rate; LFPR; labour productivity growth rate; LPGR; tax elasticity; pay as you go policy; GDP equation of labour supply and productivity; net operating balance; NOB; tax policy; savings; growth theory and population ageing; tax elasticity of the labour supply; savings and ageing|
|Subjects:||D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
J - Labor and Demographic Economics > J1 - Demographic Economics
J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J26 - Retirement; Retirement Policies
|Depositing User:||William Paul Bell|
|Date Deposited:||23. Apr 2012 02:35|
|Last Modified:||11. Feb 2013 17:55|
ABS (Australian Bureau of Statistics) 1999, Labour Force Projections, Australia, viewed 31 March 2005, <http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/Lookup/CA25687100069892CA256889000A645C/$File/62600_1999%20to%202016.pdf>.
— 2002a, Population Projections, Australia 2002-2101, viewed 21 March 2005, <http://www.abs.gov.au/Ausstats/abs@.nsf/7884593a92027766ca2568b5007b8617/f44350d6db1bc2baca256889002853de!OpenDocument>.
— 2002b, Measuring Australia's Progress, viewed 30 March 2005, <http://www.abs.gov.au/Ausstats/abs@.nsf/0/62b8c60571b49b21ca256bdc0012241b?OpenDocument#Links>.
— 2003a, Population Projections, Australia 2002-2101, viewed 21 March 2005, <http://www.abs.gov.au/Ausstats/abs@.nsf/lookupMF/0CD69EF8568DEC8ECA2568A900139392>.
— 2003b, Population Projections, Australia 2002-2051, viewed 15 April 2005, <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/6B292C921FD30ADECA25688D000994A3>.
— 2004a, Taxation Revenue, viewed 2 May 2004, <http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/Lookup/9AA3C791425FE6FBCA256E6900000CE6/$File/55060_2002-03.pdf>.
— 2004b, Labour Statistics In Brief, Australia, viewed 3 May 2004, <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/B8005CE4A21A70CFCA256888002052D9>.
— 2004c, Yearbook Australia, 2004, viewed 5 May 2004, <http://www.abs.gov.au/Ausstats/abs@.nsf/0/0645b67085ab6449ca256dea000539e4?OpenDocument>.
— 2004d, Government Finance Statistics, Australia 2002-03, viewed 24 April 2004, <http://www.abs.gov.au/Ausstats/abs@.nsf/Lookup/17B6DA48269F7CA8CA256A680082519C>.
— 2004e, Measures of Australia's Progress - National Income, viewed 5 April 2005, <http://www.abs.gov.au/ausstats/abs@.nsf/0/58c24222f0c6ab4dca256e7d00002644?OpenDocument>.
— 2004f, Estimated Resident Population 1971-2004, viewed 15 April 2005, <http://www.abs.gov.au/ausstats/abs@.nsf/c08c69053a26f3e2ca2568b5007b861a/af3a416eb2791dcbca25688d00098a09!OpenDocument>.
— 2004g, Education and Work, Australia, May 2004, Cat. no. 6227.0, Canberra.
— 2004h, Disability, Australia 2003, viewed 30 April 2005, <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/691AD4FD72C8F9BACA256E9000779C38>.
— 2004i, Household and Family Projections, Projected Households 2001-26, Cat. no. 3236.0.
— 2005a, Taxation Revenue 2003-04, viewed 15 April 2005, <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/ACE2B395A8657B91CA256A6800820742>.
— 2005b, Schools 2004, Cat. no. 4221.0, Canberra.
— 2005c, Government Finance Statistics, Australia 2003-04, viewed 12 May 2005, <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/FD33A84CD8D8356ACA256888002913F5>.
— 2005d, Schools 2004, viewed 16 May 2005, <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/EE4E59A95D837129CA256FB1007F8B0F>.
— 2005e, Labour Force by Sex, State, Age, Marital Status, viewed 15 April 2005, <http://www.abs.gov.au/Ausstats/abs@.nsf/0/1dcd924deeffc2acca256ef50001adaa?OpenDocument>.
AIHW (Australian Institute of Health and Welfare) 1998, Health expenditure on older people, viewed 1 May 2004, <http://www.aihw.gov.au/publications/welfare/oag/oag-c36.html>.
— 2003, Australia's Welfare 2003, AIHW Cat. No. AUS-41, Canberra.
— 2004a, Australia's Health 2004, AIHW Cat. No. AUS-44, Canberra.
— 2004b, Health system expenditure on disease and injury in Australia, 2000–01, HWE 26, Series 19, Canberra.
— 2005, Interactive expenditure data, viewed 15 March 2005, <http://www.aihw.gov.au/expenditure/datacubes/index.cfm>.
Andrieu, M 1999, 'Population growth: facing the challenge', The OECD Observer, vol. 217/218, pp. 29-31.
Arrow 1962, 'The Economic Implications of Learning by Doing', Review of Economic Studies, vol. 29, no. 3, pp. 155-73.
Australian Government 2005, Budget 2005-06 at a Glance, viewed 1 July 2005, <http://www.budget.gov.au/2005-06/at_a_glance/download/at_a_glance.pdf>.
Banks, G 2004, 'An ageing Australia: small beer or big bucks?' paper presented to the South Australian Centre for Economic Studies, Economic Briefing, Adelaide, 29 April 2004.
Barro, RJ 1989, 'The Ricardian Approach to Budget Deficits', The Journal of Economic Perspectives, vol. 3, no. 2, pp. 37-54.
Barro, RJ & Sala-i-Martin, X 1995, Economic growth, McGraw-Hill advanced series in economics, McGraw-Hill, New York.
Bjornerud, S & Martins, JO 2005, 'Disentangling Demographic and Non-demographic Drivers of Health Spending: a Possible Methodology and Data Requirements', paper presented to Understanding Trends in Disability Among Elderly Populations and the Implications of Demographic and Non-demographic Factors for Future Health and Long-term Care Costs, Brussels, 22 February 2005.
Bloom, DE & Williamson, JG 1998, 'Demographic Transitions and Economic Miracles in Emerging Asia', The World Bank Economic Review, vol. 12, no. 3, pp. 419-55.
Brahs, SJ 2001, 'Public Policy Implications of the World's Ageing Populations', The Geneva Papers on Risk and Insurance, vol. 26, no. 1, pp. 105-13.
Canton, E, Ewijk, CV & Tang, PJG 2003, Population Ageing and International Capital Flows, European Network of Economic Policy Research Institutes, Brussels.
Carey, D 2004, Coping with Population Ageing in Australia, OECD, viewed 25 June 2005, <http://www.oecd.org/dataoecd/0/19/1879131.pdf>.
Creedy, J 1999, 'Population Ageing and the Growth of Social Expenditure', paper presented to Policy Implications of the Ageing of Australia's Population Conference, Canberra, 10 August 1999.
Cutler, DM, Poterba, JM, Sheiner, LM, Summers, LH & Akerlof, GA 1990, 'An Aging Society: Opportunity or Challenge?' Brookings Papers on Economic Activity, vol. 1990, no. 1, pp. 1-73.
Day, C & Dowrick, S 2004, 'Ageing Economics', Agenda, vol. 11, no. 1, pp. 3-20.
de Bruin, A & Firkin, P 2001, 'An Exploration of Ageing and Self-Employment', paper presented to Creating innovative growth companies, 14th Conference of the Small Enterprise Association of Australia and New Zealand and SME Summit, Wellington, New Zealand, 13-15 September.
Disney, R 1996, 'Ageing and Saving', Fiscal Studies, vol. 17, no. 2, pp. 83-102.
Dixon, PB & Rimmer, MT 2000, A Wage/Tax Policy to Increase Employment, Centre of Policy Studies, Monash University.
Dornbusch, R, Bodman, P, Crosby, M, Fischer, S & Startz, R 2002, Macroeconomics, Australian edn, McGraw-Hill Australia, Sydney.
Dowrick, S 2002, 'Investing in the Knowledge Economy: Implications for Australian Economic Growth', paper presented to 2002 Economic and Social Outlook Conference, Melbourne, 16 April 2002.
Duval, R 2004, The Retirement Effects of Old-age Pension and Early Retirement Schemes in OECD Countries, Department of Economics, OECD, Paris.
DVA (Department of Veterans Affairs) 2004, Annual Report 2003–04, <http://www.dva.gov.au/media/aboutus/annrep04/pdfs/Outcome2.pdf>.
Edey, M 2005, 'The Challenges of an Ageing Population', paper presented to Fifth APEC Future Economic Leaders Think-tank, Sydney, 22 June 2005.
Elmendorf, DW & Sheiner, LM 2000, 'Should America Save for Its Old Age? Fiscal Policy, Population Aging, and National Saving', The Journal of Economic Perspectives, vol. 14, no. 3, pp. 57-74.
FaCS (Department of Family and Community Services) 2001, Income Support and Related Statistics: A 10 Year Compendium, 1989–1999, Occasional Paper no. 1.
— 2003, Income support customers: A statistical overview 2001, Occasional Paper no. 7, Canberra.
— 2004, Annual Report 2003-04, viewed 27 April 2005, <http://www.facs.gov.au/annualreport/2004/index.htm>.
Farrell, D, Ghai, S & Shavers, T 2005, The demographic deficit: How aging will reduce global wealth, The McKinsey Quarterly, viewed 5 April 2005, <http://www.mckinseyquarterly.com/article_page.aspx?ar=1588&L2=7&L3=10&srid=17&gp=0>.
Fougère, M & Mérette, M 1998, Population Ageing and the Current Account in Selected OECD Countries, Working Paper 1998-04, Department of Finance, Government of Canada, Ottawa.
Friedman, M 1957, A Theory of the Consumption Function, Princeton University Press, Princeton.
Gruen, D & Garbutt, M 2003, The Output Implications of Higher Labour Force Participation, Treasury Working Paper 2003-02, Canberra.
— 2004, The Long Term Fiscal Implications of Raising Australian Labour Force Participation or Productivity Growth, Treasury, Canberra.
Guest, RS 2004a, A Dividend from Workforce Ageing in Australia, Macro Research Group, Griffith University, Brisbane.
— 2004b, 'Australia's Older and Wealthier Future', Policy, vol. 20, no. 2, pp. 3-9.
Guest, RS & McDonald, IM 2000, 'Population ageing and projections of government social outlays in Australia', The Australian Economic Review, vol. 33, no. 1, p. 49.
— 2001, 'Ageing, optimal national saving and future living standards in Australia', Economic Record, vol. 77, no. 237, p. 117.
— 2002, 'Prospective demographic changes and Australia's living standards in the 21st century', People and Place, vol. 10, no. 2, pp. 6-15.
— 2004, 'Demographic Transition and Optimal Saving in Four Asian Countries', Economic Analysis and Policy, vol. 34, no. 1, pp. 1-13.
Henry, K 2004, 'Fiscal and Business Outlook', paper presented to The Australian Business Economists, Sydney.
Heylighen, F 2005, Web Dictionary of Cybernetics and Systems, viewed 15 April 2005, <http://pespmc1.vub.ac.be/ASC/indexASC.html>.
HIC (Health Insurance Commission) 2005, Annual Report 2003-2004 Statistical Tables, viewed 3 May 2005, <http://www.hic.gov.au/abouthic/our_organisation/annual_report/03_04/statistics.htm>.
Hogan, W 2004, Review of pricing arrangements in residential aged care, Australian Government Department of Health and Ageing, Canberra.
Jackson, N 2001, The policy-maker's guide to population ageing: key concepts and issues, Dept. of Family and Community Services, Canberra.
Jackson, N & Felmingham, B 2004, 'The Demographic Gift in Australia', Agenda, vol. 11, no. 1, pp. 21-37.
Jones, CI 2002, Introduction to economic growth, 2nd edn, W.W. Norton, New York.
Kenc, T & Sayan, S 2001, 'Demographic shock transmission from large to small countries: An overlapping generations CGE analysis', Journal of Policy Modeling, vol. 23, no. 6, pp. 677-702.
Lenehan, AJ 1996, 'The macroeconomic effects of the post war baby boom: Evidence from Australia', Journal of Macroeconomics, vol. 18, no. 1, pp. 155-69.
Lucas Jr., RE 1988, 'On the Mechanics of Economic Development', Journal of Monetary Economics, vol. 22, no. 1, pp. 3-42.
Maddison, A 1995, Monitoring the world economy, 1820-1992, Development Centre Studies, Development Centre of the Organisation for Economic Co-operation and Development, Paris.
Mankiw, NG, Romer, D & Weil, DN 1992, 'A Contribution to the Empirics of Economic Growth', Quarterly Journal of Economics, vol. 107, no. 2, pp. 407-37.
McMorrow, K & Roeger, W 2001, The Economic Consequences of Ageing Populations: A comparison of the EU, US and Japan, Directorate-General for Economic and Financial Affairs for the European Commission, viewed 21 February 2005, <http://europa.eu.int/comm/economy_finance/publications/economic_papers/2001/ecp138p1en.pdf>.
Mitchell, DJ & O’Quinn, RP 1997, Australia's Privatised Retirement System: Lessons for the United States, The Heritage Foundation, Washington, D.C.
Modigliani, F 1985, 'Life Cycle, Individual Thrift and the Wealth of Nations', in K-G Mäler (ed.), Nobel Lectures in Economic Sciences 1981-1990, World Scientific Publishing Company, Stockholm, pp. 150-71.
Mulligan, CB & Sala-I-Martin, X 1993, 'Transitional Dynamics in Two-Sector Models of Endogenous Growth', The Quarterly Journal of Economics, vol. 108, no. 3, pp. 739-73.
NATSEM (National Centre for Social and Economic Modelling) 1995, Modelling Australian Public Health Expenditure, STINMOD Technical Paper No. 8, Canberra.
— 1998, Re-Examining the Distribution of Health Benefits in Australia who Benefits from the Pharmaceutical Benefits Scheme?, Discussion Paper no. 36, Canberra.
— 2003a, The Australian Pharmaceutical benefit Scheme and Older Australians: Changes in Government Outlays and Consumer Costs from the 2002-03 Federal Budget Measures, Canberra.
— 2003b, 'The Distributional Impact of Government Outlays on the Australian Pharmaceutical Benefits Scheme in 2001-02', paper presented to Conference of Economists, Canberra, 29 September 2003.
— 2005, 'Redistribution, the Welfare State and Lifetime Transitions', paper presented to Transitions and Risk: New Directions in Social Policy, Melbourne, 24 February 2005.
OECD (Organisation for Economic Cooperation and Development) 1996, Ageing in OECD Countries: A Critical Policy Challenge, Social Policy Studies, no. 20, Paris.
— 2003, Ageing Societies and the Looming Pension Crisis, viewed 15 April 2005, <http://www.oecd.org/document/59/0,2340,en_2649_201185_2512699_1_1_1_1,00.html>.
— 2004a, Employment Outlook, viewed 15 May 2004, <http://www.oecd.org/dataoecd/42/55/32494755.pdf>.
— 2004b, Female Labour Force Participation: Past Trends and Main Determinants in OECD Countries, viewed 1 July 2005, <http://www.oecd.org/dataoecd/25/5/31743836.pdf>.
Parliament of Australia 2004, Paid Maternity Leave, viewed 15 June 2005, <http://www.aph.gov.au/library/intguide/ECON/maternity_leave.htm>.
Peters, M, Cressy, RC & Storey, DJ 1999, The Economic Impact of Ageing on Entrepreneurship and SMEs, Forward Studies Unit, European Commission, viewed 19 August 2005, <http://users.wbs.warwick.ac.uk/group/csme/research/ageing_entrepreneurship>.
Productivity Commission 2004a, Economic Implications of an Ageing Australia, Draft Research Report, Canberra.
— 2004b, Review of National Competition Policy Reforms, Discussion Draft, Canberra.
— 2005a, Economic Implications of an Ageing Australia, Research Report, Canberra.
— 2005b, Economic Implications of an Ageing Australia, Technical Papers, Canberra.
— 2005c, Economic Implications of an Ageing Australia, Data, viewed 20 April 2005, <http://www.pc.gov.au/study/ageing/finalreport/data/index.html>.
— 2005d, Review of National Competition Policy Reforms, Report no. 33, Canberra.
RBA (Reserve Bank of Australia) 2005, RBA Statistics, viewed 8 August 2005, <http://www.rba.gov.au/>.
Rogers, M 2003, 'A Survey of Economic Growth', Economic Record, vol. 79, no. 244 (March), pp. 112-35.
Romer, D 2001, Advanced macroeconomics, 2nd edn, McGraw-Hill, Boston.
Romer, PM 1986, 'Increasing Returns and Long-Run Growth', The Journal of Political Economy, vol. 94, no. 5, pp. 1002-37.
— 1990, 'Endogenous Technological Change', The Journal of Political Economy, vol. 98, no. 5, part 2, pp. S71-S102.
— 1994, 'The Origins of Endogenous Growth', The Journal of Economic Perspectives, vol. 8, no. 1, pp. 3-22.
Roseveare, D, Leibfritz, W, Fore, D & Wurzel, E 1996, Ageing Populations, Pension Systems and government Budgets: Simulations for 20 OECD countries, Organisation for Economic Cooperation and Development, Paris.
Schulz, E 2004, Ageing, Health and Retirement in Europe: Use of Health and Nursing Care by the Elderly, European Network of Economic Policy Research Institutes, Berlin.
SCRGSP (Steering Committee for the Review of Government Service Provision) 2005, Report on Government Services 2005, Productivity Commission, Canberra.
Solow, RM 1956, 'A Contribution to the Theory of Economic Growth', The Quarterly Journal of Economics, vol. 70, no. 1, pp. 65-94.
— 1957, 'Technical Change and the Aggregate Production Function', The Review of Economics and Statistics, vol. 39, no. 3, pp. 312-20.
— 1987, 'Growth Theory and After', in K-G Mäler (ed.), Nobel Lectures in Economic Sciences 1981-1990, World Scientific Publishing Company, Stockholm.
Spiezia, V 2002, 'The greying population: A wasted human capital or just a social liability?' International Labour Review, vol. 141, no. 1-2, pp. 71-113.
Treasurer 2004, Australia’s Demographic Challenges, Commonwealth of Australia, Canberra.
— 2005, GST, State Taxes, Interest Rates, Commonwealth of Australia, viewed 12 July 2005, <http://www.treasurer.gov.au/tsr/content/transcripts/2005/023.asp>.
Treasury 1992, Retirement Income Modelling, viewed 1 May 2005, <http://www.rim.treasury.gov.au/content/models.asp>.
— 2002, Intergenerational Report 2002-03 - Budget Paper No. 5, Commonwealth of Australia, Canberra.
Turner, A 2005, Can pension plans age gracefully?, McKinsey Quarterly, viewed 7 May 2005, <http://www.mckinseyquarterly.com/article_abstract.aspx?ar=1606&L2=19&L3=67&srid=17&gp=0>.