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Can welfare states outgrow their fiscal sustainability problems?

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The paper analyses the fiscal effects of productivity shifts in the private sector. Within a stylized model with inelastic labour supply, it shows that productivity shifts in sectors producing non-traded goods (N-sector) are irrelevant for the tax rates necessary to meet the government budget constraint. Also productivity shifts in the traded goods sector (T-sector) have a neutral fiscal effect, provided that the wage dependency of the tax bases and government expenditures are equal. If the wage dependency of expenditures exceeds that of revenues, tax rates must be increased in order to restore the government budget constraint. Simulations on a CGE model of the Norwegian economy confirm the theoretical results, and demonstrate that productivty growth on balance has an adverse fiscal effect. Moreover, the necessary increase in the tax rates of a productivity improvement in the T-sector is three times as high as the corresponding effect of a comparable productivity shift in the N-sector.

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  • Erling Holmøy, 2006. "Can welfare states outgrow their fiscal sustainability problems?," Discussion Papers 487, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:487
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    1. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis, in: Handbook of Microsimulation Modelling, volume 127, pages 167-221, Emerald Group Publishing Limited.
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    Cited by:

    1. Erling Holmøy, 2007. "Fiscal sustainability: Must the problem be diminished before we can see it?," Discussion Papers 499, Statistics Norway, Research Department.

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    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy

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