Skip to main content
Article thumbnail
Location of Repository

Alternatives for Raising Living Standards

By William Scarth

Abstract

Given the fundamental goal of raising living standards in the longer term, much attention is paid to policies that can be expected to increase national saving. With respect to private saving, the mechanism is tax reform - a lower tax on interest income. The basic problem with this approach is that, for a given size of government, some other tax or transfer must be adjusted to finance the interest-tax cut. This fact may make it difficult to ensure that those with only labour income will share in the spoils. An alternative is to concentrate on public saving. Ultimately, deficit reduction makes possible lower taxes and/or higher transfer payments across the board. This reasoning suggests that debt reduction may be the more equitable government initiative. But there are other options such as investing in human capital and altering the population growth rate through immigration policy. The latter option is pursued in this paper. According to the standard neoclassical growth model, a lower population growth rate raises steady-state living standards, but things are more complicated in an optimization-based overlapping-generations context. This paper extends Blanchard's constant-planning-horizon model of disjoint agents to allow for retirement, a subset of the population that remains liquidity constrained, and various taxes and transfers - in a small open-economy setting. Tax reform, debt reduction and population growth policies are compared in an internally consistent manner. For each policy, both the immediate and steady-state effects are derived, and the present value of the entire time path for consumption between these two end-points is also analyzed (for all three policy initiatives). A calibrated version of the model is used to identify policy combinations that can deliver long-term gain without short-term pain, and without problems for the hand- to- mouth subset of the population.living standards; tax reform; debt reduction; population growth

OAI identifier:

Suggested articles

Citations

  1. (1956). A Contribution to the Theory of Economic Growth,"
  2. (1980). An Alternative to Steady-State Comparisons,"
  3. (1994). Debt Reduction with Distorting Taxes and Incomplete Ricardianism: A Computable General Equilibrium Analysis,"
  4. (1985). Debt, Deficits and Finite Horizons,"
  5. (1994). Government Debt and Deficits in Canada: A Macro Simulation Analysis,"
  6. (1996). Macroeconomics: An Introduction to Advanced Methods, second edition (Toronto:
  7. (1988). Optimal Time-Consistent Fiscal Policy with Finite Lifetimes: Analysis and Extensions,"
  8. (1994). Social Security and Foreign Indebtedness in a Small Open Economy,"
  9. (1993). Terms of Trade Disturbances and Fiscal Policy in a Small Open Economy,"
  10. (1997). The Target Debt-to-GDP Ratio: How Big Should It Be? And How Quickly Should We Approach It? in a forthcoming volume based on a conference organized by the

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.