Faculty of Science, Technology and Medicine
Faculty of Law, Economics and Finance
Faculty of Humanities, Education and Social Sciences
Interdisciplinary Centre for Security, Reliability and Trust
Luxembourg Centre for Systems Biomedicine
Luxembourg Centre for Contemporary and Digital History
Luxembourg Centre for European Law
Luxembourg Centre for Socio-Environmental Systems
Population Ageing, Economic Growth and the Composition of Government Expenditure
Abstract
This paper investigates how population ageing affects economic growth by altering the composition of government expenditure.
We develop and test an original political economy model in which an aging population shifts the preferences of the median voter, leading to increased elderly spending at the expense of private investment, thus reducing growth.
The model yields three predictions: population ageing (i) raises elderly spending (as a share of output); (ii) does not affect productive expenditure (as a share of output); and (iii) lowers economic growth.Using data from the Organisation for Economic Co-operation and Development covering the period 2007–2018 and both Ordinary Least Squares and Instrumental Variables regression analyses, we find strong support for prediction (i): population ageing significantly increases spending on “old age” and “hospital services.”
Consistent with (ii), there is no significant impact on “tertiary education,” “transport,” “communication,” or Research and Development (“R&D”).
Finally, using a Generalised Method of Moments estimation approach with a broader sample of 178 countries, we confirm prediction (iii): healthcare expenditure negatively affects growth.
Language
English
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