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Intergenerational Smoothing of New Zealand’s Future Fiscal Costs

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  • Ross Guest

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    (Griffith University)

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    Abstract

    This paper applies an overlapping generations model in order to evaluate the implications of intergenerational smoothing of New Zealand’s future fiscal costs. The analysis complements the New Zealand fiscal projections of Bell et al. (2010) and the New Zealand tax smoothing analysis in Davis and Fabling (2002). It allows for feedback effects of the tax rate on labour supply through both intratemporal and intertemporal effects which in turn feed back to fiscal projections via taxation revenue. Under Treasury’s sustainable debt projections, which implies convergence to a stable 20% net debt to GDP ratio, generations born prior to 1990 are worse off and those born after 2000 are better off (measured by the impact on their remaining lifetime income). However, the magnitudes of the impact on the remaining lifetime income of all generations are small – no greater that 0.7% under the Medium demographic scenario. Those born around 1960 fare the worst, while those born after 2020 fare the best. The losses to current generations are weighed up against the gains to future generations through the social welfare function. The results show that net social gains are possible provided the gains to future generations are given sufficient weight by a low rate of social time preference and a high rate of aversion to variability in aggregate consumption over time. The parameter values required to generate net social gains are close to the bounds of plausible values. The magnitudes of the net social gains/losses range from minus $90 to plus $94 per capita per year.

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    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2013/13-12/twp13-12.pdf
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    Bibliographic Info

    Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 13/12.

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    Length: 30
    Date of creation: Jul 2013
    Date of revision:
    Handle: RePEc:nzt:nztwps:13/12

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    1. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
    2. Mariano Kulish & Kathryn Smith & Christopher Kent, 2006. "Ageing, Retirement and Savings: A General Equilibrium Analysis," RBA Research Discussion Papers rdp2006-06, Reserve Bank of Australia.
    3. Jamaes P. Ziliak & Thomas J. Kniesner, 2003. "The Effect of Income Taxation on Consumption and Labor Supply," Center for Policy Research Working Papers 54, Center for Policy Research, Maxwell School, Syracuse University.
    4. Matthew Bell & Gary Blick & Oscar Parkyn & Paul Rodway & Polly Vowles, 2010. "Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position," Treasury Working Paper Series 10/01, New Zealand Treasury.
    5. Heikki Oksanen, 2003. "Population ageing and public finance targets," European Economy - Economic Papers 196, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    6. Nick Davis & Richard Fabling, 2002. "Population Ageing and the Efficiency of Fiscal Policy in New Zealand," Treasury Working Paper Series 02/11, New Zealand Treasury.
    7. Ross Guest, 2008. "Smoothing the Fiscal Costs of Population Ageing in Australia: Effects on Intergenerational Equity and Social Welfare," The Economic Record, The Economic Society of Australia, vol. 84(265), pages 177-192, 06.
    8. Ross Guest & John Bryant & Grant Scobie, 2003. "Population Ageing In New Zealand: Implications for Living Standards and the Optimal Rate of Saving," Treasury Working Paper Series 03/10, New Zealand Treasury.
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