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Population Ageing and the Efficiency of Fiscal Policy in New Zealand - WP 02/11

Publication Details

  • Population Ageing and the Efficiency of Fiscal Policy in New Zealand
  • Published: Aug 2002
  • Status: Current
  • Authors: Davis, Nick; Fabling, Richard
  • JEL Classification: H30; H60
  • Hard copy: Available in HTML and PDF formats only.
 

Population Ageing and the Efficiency of Fiscal Policy in New Zealand

New Zealand Treasury Working Paper 02/11

Published: June 2002

Authors: Nick Davis and Richard Fabling

Abstract

New Zealand’s ageing population is expected to have a significant impact on long-term government expenditure, particularly in the areas of health and superannuation. Recent projections from Treasury’s Long-Term Fiscal Model suggest that, under current policy settings, government expenditure (excluding financing costs) will increase by approximately seven percentage points of GDP by 2050. From the perspective of economic efficiency, we consider several methods for financing that expenditure.

We find that tax smoothing is significantly more efficient, from a welfare perspective, than balancing the budget. This result is primarily due to our assumption that the assets accumulated under tax smoothing earn an average return over the government’s cost of borrowing. This excess return is not without risk. By modelling asset returns and economic growth in a stochastic manner we find that tax smoothing with a diversified portfolio of financial instruments may also reduce year-on-year tax rate volatility.

Introducing practical considerations, in particular expenditure creep (where additional government spending is triggered by an improving balance sheet position), tips the scales in favour of a balanced budget approach. Hence, strong fiscal institutions are a prerequisite for achieving the welfare gains from tax smoothing.

Table of Contents

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Abstract

Table of Contents

List of Tables

List of Figures

1 Introduction

2 Analytical framework

3 Results

4 Practical limitations of tax smoothing

5 Conclusions

Appendix: Assumptions for Stochastic Simulations

References

twp02-11.pdf (593 KB) pp. 23

List of Tables

List of Figures

Acknowledgements

Disclaimer

The views expressed in this Working Paper are those of the author(s) and do not necessarily reflect the views of the New Zealand Treasury. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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