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Can fiscal drag pay for the public spending effects of population ageing in New Zealand?

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  • John Creedy
  • Norman Gemmell

Abstract

This paper examines the extent to which projected aggregate tax revenue changes, in association with population ageing over the next 50 years, can be expected to finance expected increases in social welfare expenditures. Projections from two separate models, dealing with social expenditures and income tax and GST revenue, are used. The results suggest that the modest required increase in the overall average tax rate projected over the next 50 years can be achieved automatically by adjusting income tax thresholds using an index of prices rather than wages. Based on evidence about the New Zealand tax system over the last 50 years, comparisons of average and marginal tax rates suggest that such an increase may be feasible and affordable. The paper discusses the range of considerations involved in deciding if this automatic increase in the aggregate average tax rate, via real fiscal drag of personal income taxes, is desirable compared with alternative fiscal policy changes.

Suggested Citation

  • John Creedy & Norman Gemmell, 2014. "Can fiscal drag pay for the public spending effects of population ageing in New Zealand?," New Zealand Economic Papers, Taylor & Francis Journals, vol. 48(2), pages 183-195, August.
    • Handle: RePEc:taf:nzecpp:v:48:y:2014:i:2:p:183-195
    DOI: 10.1080/00779954.2013.874394
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    References listed on IDEAS

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    1. Fiona McAlister & Debasis Bandyopadhyay & Robert Barro & Jeremy Couchman & Norman Gemmell & Gordon Liao, 2012. "Average Marginal Income Tax Rates for New Zealand, 1907-2009," Treasury Working Paper Series 12/04, New Zealand Treasury.
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