Dynamic fiscal policy with demographic change: Australian case

Submission note: This dissertation is submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the School of Economics and Finance, Faculty of Law and Management, La Trobe University, Bundoora.

Australia is at the verge of major demographic change. It has an ageing population, which is mainly attributed to a falling fertility rate and longer life expectancy. There is no doubt this demographic trend will have a significant impact on the government budget and the economy as a whole. This thesis studies the impact of ageing in the long run on micro and macroeconomic developments in Australia, based on the closed economy large scale overlapping generations model. The model includes two modules: population and economic. The economic module feeds the data from the population module to account for realistic demographic changes in the long run. Based on recent debates in Australia, three main areas were targeted for economic analysis and simulations in the long run: personal income tax, pension reform and immigration reforms. The model was firstly calibrated into the Australian economy to project the transition path of the economy, encompassing only demographic changes without any policy simulations. The findings suggest that ageing will have a significant impact on the government budget in terms of pension benefits and health care costs. The labour supply will increase by a lesser degree compared to capital stock, resulting in a reduction of capital price and a rise in wages. The living standards in terms of per capita income were found to decrease after 2030, when most of the baby boomers will be retired. In this regard, several policy simulations were considered to ease the effect of ageing. The adoption of flat income tax, an elimination of personal income tax and a move towards consumption tax were found to have a positive effect on the economy, with a small welfare loss of older generations for a later case compared to the utility achieved without policy reform and the most benefits accruing to high-income individuals in both scenarios. The pension reform policies, including increasing pension age, show the tax burden on the working population with decrease, but the result will be offset if benefits are increased by twenty per cent. Simulations of flat pension policy system for all income groups show a benefit to mostly high and middle-income earners.