5 Conclusion
Forecasting future trends in government social expenditures requires a model of how expenditure trends emerge from the policy process. Razin et al (2002) have recently made significant progress towards this objective. Their work is notable partly for its theoretical innovations and partly because the conclusions are contrary to the conventional wisdom. Whereas many commentators assume that rises in the number of older voters must put upward pressure on expenditures per capita, Razin et al draw attention to the offsetting effect of increased fiscal leakage and distortion of investment decisions. Their statistical analysis, which they warn is only preliminary, suggests that the fiscal leakage and distortion effects have been outweighing the voting power effect in their panel of 13 OECD countries, so that population ageing has been creating downward pressures on per capita expenditures.
This paper has argued, however, that the balance between the pro-benefit and anti-benefit effects is likely to be different for young dependants than for old dependants. This suggests that extending Razin et al’s framework to include young dependants as well as old ones would be productive. Repeating Razin et al’s statistical with a disaggregated dependency ratio indicates that changes in old-age dependency and youth dependency do indeed have different effects on taxes and benefits. Youth dependency seems to be negatively correlated with tax and benefit levels, while old-age dependency seems to be positively correlated with taxes and (possibly) benefits.
All the same caveats that Razin et al apply to their statistical analysis also apply to the analysis presented here. However, the results presented here demonstrate the value of distinguishing between broad age groups when modelling the effects of population ageing on the policy process. The results also imply an opposite prediction about the future size of the welfare state to the one made by Razin et al (2002: 917). Based on the finding that taxes and benefits are negatively correlated with the combined dependency ratio, Razin et al suggest that the rising dependency ratio associated with population aging may exert downward pressure on taxes and benefits. The analysis presented here suggests that falling youth dependency and rising old-age dependency both put upward pressure on taxes and benefits. Falling youth dependency and rising old-age dependency are exactly what current population projections envisage for coming decades.
