This paper considers implications of population aging for the conduct of fiscal policy, grouping the issues into four areas, focusing on the impact of aging on:
(1) the size of government budget imbalances;
(2) the composition of government spending and government budget flexibility;
(3) the composition of tax collections and the desirability of alternative tax systems; and
(4) the effectiveness of fiscal policy as a tool for stabilization.
Societal aging puts considerable stress put on public sector finances because of large, unfunded and age-based entitlement programs. Even if existing programs can be modified, a growing share of government budgets will be devoted to old-age entitlement programs, and both economics and politics suggest that this will reduce the flexibility of budget determinations. An aging population makes certain tax bases – in particular, consumption taxes, and wealth transfer taxes as well – more productive and efficient. The consequences of aging are less clear as to stabilization policy, both with respect to the effectiveness of automatic stabilizers and the ability of government to take effective discretionary actions.
Keywords: deficits; fiscal imbalances; tax reform; political economy; stabilization policy
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.