Impact of Demographic Change Upon the Sustainability of Fiscal Policy

Abstract

This paper analyzes the impact of demographic change on the sustainability of fiscal policy. Firstly, we study the main causes of the deterioration of Japanese government fiscal conditions from the demographic point of view. Next, we investigate the impact of Korean population aging on the long-term fiscal conditions using the method of the forward looking measure of Generational Accounting.

Most of the deterioration in the fiscal situation of the Japanese government since 1990 can be explained by an increase in social security costs related with population aging and a decrease in tax revenue caused by lackluster economy. Considering the rapid population aging, Korean government’s fiscal condition, evaluated to be very sound currently, could also deteriorate soon without counteracting preemptively. The results of Korean Generational Accounting show that the social security related expenditures are main drives for the deterioration of long-term fiscal condition. In addition, as shown by the case of Japan, the effect of the decreased tax revenue could be greater than that of increased expenditure. The policy for improving the tax revenue through economic growth is also very important for the sustainability of government finance.

Keywords: Demographic structure, Generational Accounting, Social security costs

JEL Classification: E24, H50, J10