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Population ageing, fiscal pressure and tax smoothing: a CGE application to Australia

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  • Ross Guest

Abstract

This paper analyses the fiscal pressure from population ageing using an intertemporal CGE model, applied to Australia, and compares the results with those of a recent government-commissioned study. The latter study uses an alternative modelling approach based on extrapolation rather than optimising behaviour of consumers and firms. The deadweight losses from the fiscal pressure caused by population ageing are equivalent to an annual loss of consumption of $260 per person per year in 2003 dollars in the balanced-budget scenario. A feasible degree of tax smoothing would reduce this welfare loss by an equivalent of $70 per person per year. Unlike the extrapolation-based model, the CGE approach takes account of feedback effects of ageing-induced tax increases on consumption and labour supply, which in turn impact on the ultimate magnitude of fiscal pressure and therefore tax increases. However, a counterfactual simulation suggests that the difference in terms of deadweight losses between the two modelling approaches is modest, at about $30 per person per year.

Suggested Citation

  • Ross Guest, 2006. "Population ageing, fiscal pressure and tax smoothing: a CGE application to Australia," Fiscal Studies, Institute for Fiscal Studies, vol. 27(2), pages 183-203, June.
  • Handle: RePEc:ifs:fistud:v:27:y:2006:i:2:p:183-203
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    Cited by:

    1. John Creedy & Jamas Enright & Norman Gemmell & Angela Mellish, 2010. "Population ageing and taxation in New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 44(2), pages 137-158.
    2. repec:eee:hapoch:v1_713 is not listed on IDEAS
    3. Nick Draper & Alex Armstrong, 2007. "GAMMA; a simulation model for ageing, pensions and public finances," CPB Document 147, CPB Netherlands Bureau for Economic Policy Analysis.

    More about this item

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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