Population Ageing, Fiscal Pressure and Tax Smoothing: A CGE Application to Australia

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 governmentcommissioned study. The latter study uses an alternative modelling approach based on extrapolation rather than optimizing 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 counter-factual simulation suggests that the difference in terms of deadweight losses between the two modelling approaches is modest at about $30 per person per year. JEL codes: H31, H32, J18, E21 Corresponding author: Ross Guest Professor of Economics Griffith Business School Griffith University PMB 50 Gold Coast Mail Centre Queensland 9726 Australia