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Population Ageing, Fiscal Pressure and Tax Smoothing: A CGE Application to Australia *
Author(s) -
Guest Ross
Publication year - 2006
Publication title -
fiscal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.63
H-Index - 40
eISSN - 1475-5890
pISSN - 0143-5671
DOI - 10.1111/j.1475-5890.2006.00032.x
Subject(s) - computable general equilibrium , economics , extrapolation , population ageing , consumption (sociology) , deadweight loss , welfare , labour supply , counterfactual thinking , population , fiscal policy , macroeconomics , government budget , econometrics , public finance , labour economics , mathematics , market economy , mathematical analysis , social science , philosophy , demography , epistemology , sociology
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.