Ageing, Immigration, and Fiscal Sustainability

This paper evaluates the sustainability of Danish fiscal policy for a given demographic development. The total population forecast is the sum of individual forecasts for 5 different origin groups including immigrants and descendents of immigrants. Results are that the demographic dependency ratio increases and has a local maximum around 2040. However, the level of the dependency ratio remains permanently 25 percent higher than the current level. Correcting for shifts in the relative sizes of the different origin groups, and taken into account the differences in the labour market participation ratio of the different origin groups, indicates that the ageing problem is larger than suggested by the demographic dependency ratio and that there is no reduction in the problem after 2040. The necessary fiscal adjustment – to fulfil the intertemporal budget constraint of the public sector – is fairly small, and involves a reduction in the level of public expenditures of 1.8 percent of GDP at factor prices. The effects of a quantitative restriction on gross immigration are also analysed. We find that a quantitative restriction that is halving immigration has very significant effects on total population. At the end of the century the population is 27 percent lower than in the baseline forecast. Real GDP, employment, and the capital stock are reduced in the same magnitude and the aggregate private consumption is reduced a little less. The effect on the necessary fiscal adjustment is very small compared to the measures. The necessary reduction in the level of public expenditures is 1.4 percent of GDP at factor prices. ∗ Thanks to Martin B. Knudsen, Anders Due Madsen, and Peter Stephensen for technical assistance and comments, and to Ida Bøkman and Lise Skovsgaard Nielsen for research assistance.