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Population Ageing, Economic Growth and the Composition of Government Expenditure

Author

Listed:
  • Andreas Irmen

    (DEM, Université du Luxembourg)

  • Maria Krelifa

    (DEM, Université du Luxembourg)

  • Johanna Kuehnel

    (University of Heidelberg, DE)

Abstract

This paper investigates how population ageing affects economic growth by altering the composition of government expenditure. We develop and test an original political economy model in which an aging population shifts the preferences of the median voter, leading to increased elderly spending at the expense of private investment, thus reducing growth. The model yields three predictions: population ageing (i) raises elderly spending (as a share of output); (ii) does not significantly affect productive expenditure; and (iii) lowers economic growth. Using OECD data from 2007-2018 and both OLS and IV regression analyses, we find strong support for prediction (i): population ageing significantly increases spending on “old age” and “hospital services.” Consistent with (ii), there is no significant impact on “tertiary education,” “transport,” “communication,” or “R&D.” Finally, using GMMbased estimation with a broader sample of 178 countries, we confirm prediction (iii): healthcare expenditure negatively affects growth.

Suggested Citation

  • Andreas Irmen & Maria Krelifa & Johanna Kuehnel, 2025. "Population Ageing, Economic Growth and the Composition of Government Expenditure," DEM Discussion Paper Series 25-15, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:25-15
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    File URL: https://hdl.handle.net/10993/64893
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    Keywords

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    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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