Population Ageing and the Efficiency of Fiscal Policy in New Zealand
AbstractNew Zealand’s ageing population is expected to have a significant impact on long-term government expenditure, particularly in the areas of health and superannuation. Recent projections from Treasury’s Long-Term Fiscal Model suggest that, under current policy settings, government expenditure (excluding financing costs) will increase by approximately seven percentage points of GDP by 2050. From the perspective of economic efficiency, we consider several methods for financing that expenditure. We find that tax smoothing is significantly more efficient, from a welfare perspective, than balancing the budget. This result is primarily due to our assumption that the assets accumulated under tax smoothing earn an average return over the government’s cost of borrowing. This excess return is not without risk. By modelling asset returns and economic growth in a stochastic manner we find that tax smoothing with a diversified portfolio of financial instruments may also reduce year-on-year tax rate volatility. Introducing practical considerations, in particular expenditure creep (where additional government spending is triggered by an improving balance sheet position), tips the scales in favour of a balanced budget approach. Hence, strong fiscal institutions are a prerequisite for achieving the welfare gains from tax smoothing.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 02/11.
Length: 23 pages
Date of creation: Jun 2002
Date of revision:
Contact details of provider:
Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz
More information through EDIRC
Public Finance; Tax Smoothing; Balanced Budget; Demographics; and Deadweight Loss;
Find related papers by JEL classification:
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-08-16 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alberto Alesina & Roberto Perotti, 1994.
"The Political Economy of Budget Deficits,"
IMF Working Papers
94/85, International Monetary Fund.
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
- Richard Blundell & Thomas MaCurdy, 1998.
"Labour supply: a review of alternative approaches,"
IFS Working Papers
W98/18, Institute for Fiscal Studies.
- Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
- Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
- repec:fth:coluec:754 is not listed on IDEAS
- Nick Davis, . "Governance of Crown Financial Assets," Treasury Working Paper Series 98/02, New Zealand Treasury.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982.
"Optimal Fiscal and Monetary Policy in an Economy Without Capital,"
532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
- John Woods, 2000. "Manual for the Long Term Fiscal Model," Treasury Working Paper Series 00/02, New Zealand Treasury.
- Jeff Huther, . "An Application of Portfolio Theory to New Zealand's Public Sector," Treasury Working Paper Series 98/04, New Zealand Treasury.
- Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
- Thai Than Dang & Pablo Antolín & Howard Oxley, 2001. "Fiscal Implications of Ageing: Projections of Age-Related Spending," OECD Economics Department Working Papers 305, OECD Publishing.
- Polackova, Hana, 1997. "Population aging and financing of government liabilities in New Zealand," Policy Research Working Paper Series 1703, The World Bank.
- Cutler, D.M. & Poterba, J.M. & Sheiner, L.M. & Summers, L.H., 1990.
"An Aging Society: Opportunity Or Challenge,"
553, Massachusetts Institute of Technology (MIT), Department of Economics.
- Andrew Caplin & John Leahy, 2001.
"The social discount rate,"
Discussion Paper / Institute for Empirical Macroeconomics
137, Federal Reserve Bank of Minneapolis.
- Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
- Alesina, A. & Perotti, R., 1995. "Fiscal Expansions and Adjustments in OECD Countries," Discussion Papers 1995_25, Columbia University, Department of Economics.
- Lassila , Jukka & Valkonen, Tarmo, 2008. "Population ageing and fiscal sustainability in Finland: a stochastic analysis," Research Discussion Papers 28/2008, Bank of Finland.
- John Creedy & Grant M Scobie, 2002. "Population Ageing and Social Expenditure in New Zealand: Stochastic Projections," Treasury Working Paper Series 02/28, New Zealand Treasury.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web and Publishing Team, The Treasury).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.