Short-run Dynamics and Long-run Effects of Demographic Change on Public Debt and the Budget

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Ulrich, Volker ; Erbsland, Manfred:
Short-run Dynamics and Long-run Effects of Demographic Change on Public Debt and the Budget.
Greifswald : Univ. , 1998 . - 28 S. - (Wirtschaftswissenschaftliche Diskussionspapiere / Universität Greifswald, Rechts- und Staatswissenschaftliche Fakultät ; 3/98 )

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Abstract

The German population is aging. Since fewer children are born and simultaneously
life expectancy rises, demographic changes will lead to a double aging process. The
paper analyzes the effects of demographic changes on national debt and the public
budget by applying a cointegration analysis to global budget variables. Our procedure
which covers the period between 1950 and 1990 completes prevailing projections,
emphasizing that low vital rates are not the basic problem but the long-run
trend of decreasing fertility and mortality rates. The estimation results of several error-
correction models show that in the long-run an increase in the old age dependency
ratio, and a decrease in the reproduction rate will lead to higher public expenditures.
As regards public revenue, the results are ambivalent. The change in the age
structure results in higher tax revenue, whereas the decline of population has the opposite
effect. Furthermore, we find empirical evidence that aging increases the debt
ratio. This development counters current efforts to reduce the public debt share of
production potential and the tax load ratio. As a consequence, more action is needed
to improve Germany’s competiveness as a business location. Compared to these
long-run effects, the short-run dynamics is only of minor importance. Significant parameter
estimates can be found mainly in the model for the social security contribution
rate.