Population ageing and fiscal responsiveness to public debt

This paper examines whether population ageing weakens governments' fiscal responsiveness to public debt and whether this relationship differs across economic and political environments. A simple political-economy model with overlapping generations shows that, because older cohorts expect to bear a smaller share of future debt-servicing costs, a rising old-age dependency ratio lowers the equilibrium response of the primary balance to inherited debt. We test this prediction with a fiscal reaction function for 62 advanced and developing economies over 1962–2024. Governments respond positively to rising debt, mainly through primary expenditure, and the response is weaker in more aged societies. With a constant debt coefficient, the ageing effect is imprecisely estimated, but Bayesian panel time-varying-parameter estimates, which absorb common changes in fiscal responsiveness over time, show that ageing clearly dampens the response: moving from the 25th to the 75th percentile of the old-age dependency ratio lowers it by about one third. The evidence comes mainly from OECD economies, where ageing is most advanced: the effect is present within the OECD sample, whereas it cannot be identified among non-OECD economies. Time-varying estimates for the components of the primary balance show that ageing weakens the response mainly through the expenditure side: more aged societies cut primary spending by less in response to debt, whereas the response of revenue is unaffected. The dampening effect is also more apparent in democratic economies, consistent with the proposed electoral mechanism.