Demographic Change and Fiscal Sustainability in Asia

Abstract

Changes in the population age structure can have a significant effect on fiscal sustainability since they can affect both government revenues and expenditures. For example, population aging will increase expenditures on the elderly while reducing potential growth and hence revenues. In this paper, we project government revenue, expenditure, and fiscal balance in developing Asia up to 2050. Using a simple stylized model and the National Transfer Accounts data set, we simulate the effect of both demographic changes and economic growth. Rapidly aging economies like the Republic of Korea; Japan; and Taipei,China, are likely to suffer a tangible deterioration of fiscal sustainability under their current tax and expenditure system. On the other hand, rapid economic growth can improve fiscal health in poorer economies with relatively young populations and still-growing working-age populations. Overall, our simulation results indicate that Asia’s population aging will adversely affect its fiscal sustainability, pointing to a need for Asian economies to further examine the impact of demographic shifts on their fiscal health.