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Population Ageing and the Efficiency of Fiscal Policy in New Zealand

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Author Info
Nick Davis
Richard Fabling () (The Treasury)

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Abstract

New 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.

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Publisher Info
Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 02/11.

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Length: 23 pages
Date of creation: Jun 2002
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Handle: RePEc:nzt:nztwps:02/11

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Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
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Web page: http://www.treasury.govt.nz
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Related research
Keywords: Public Finance Tax Smoothing Balanced Budget Demographics and Deadweight Loss

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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

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References listed on IDEAS
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.:
  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Thai Than Dang & Pablo Antolin & Howard Oxley, 2001. "Fiscal Implications of Ageing: Projections of Age-Related Spending," OECD Economics Department Working Papers 305, OECD Economics Department. [Downloadable!]
  4. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," IMF Working Papers 94/85, International Monetary Fund.
    Other versions:
  5. 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. [Downloadable!] (restricted)
    Other versions:
  6. Polackova, Hana, 1997. "Population aging and financing of government liabilities in New Zealand," Policy Research Working Paper Series 1703, The World Bank. [Downloadable!]
  7. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: A review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
    Other versions:
  8. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December. [Downloadable!] (restricted)
  9. Nick Davis, . "Governance of Crown Financial Assets," Treasury Working Paper Series 98/02, New Zealand Treasury. [Downloadable!]
  10. John Woods, 2000. "Manual for the Long Term Fiscal Model," Treasury Working Paper Series 00/02, New Zealand Treasury. [Downloadable!]
  11. Andrew Caplin & John Leahy, 2000. "The Social Discount Rate," NBER Working Papers 7983, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Jeff Huther, . "An Application of Portfolio Theory to New Zealand's Public Sector," Treasury Working Paper Series 98/04, New Zealand Treasury. [Downloadable!]
  13. Alesina, A. & Perotti, R., 1995. "Fiscal Expansions and Adjustments in OECD Countries," Discussion Papers 1995_25, Columbia University, Department of Economics.
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Cited by:
(explanations, 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.)

  1. 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. [Downloadable!]
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