Do Demographic Changes Affect Fiscal Developments?

Abstract

This article analyzes the effects of demographic changes (low fertility rates and a high old-age dependency ratio) on fiscal developments (debt, expenditure, tax revenues, social security expenditure, and social welfare revenues to GDP ratios) in Greece over the period 1960 to 1995. The empirical evidence suggests that there is a long-run relationship between each fiscal variable and the two demographic variables. The estimation results show that in the long-run the double-aging process-an increase in the old-age dependency ratio and a decrease in the fertility rate-will increase the size of public debt and total expenditure while decreasing total tax revenues. Similar results are obtained for the social security budget. Using vector error correction model estimation, the results support the proposition that the double-aging process is responsible for the deterioration of fiscal development. The results have important policy implications because the adoption of suitable policies should help improve budget developments, facilitating the real convergence of the Greek economy.