Government Expenditure Composition and Long-Run Economic Growth in the Aging Democracy

Abstract

This paper analyzes how population aging affects government expenditure composition, economic growth, and social welfare under democracy using an overlapping generations model. As public investment and welfare expenditures are financed by income tax, intergenerational conflicts remain in the aged societies. Retired generations, comprising elderly citizens, favor increased income tax rates through increased current welfare expenditures relative to public investment. Working generations, comprising young citizens, favor increased public investment but not increased income tax. Population aging strengthens elderly citizens’ political power, leading to increased taxes and budgets shifting from public investment to current welfare. Hence, population aging deteriorates economic growth and social welfare through democracies. On the other hand, population aging by an increase in longevity enhances capital accumulation by increasing savings for old-age consumption. Furthermore, an increase in longevity also brings survival benefits for young and old generations, allowing them to enjoy their retired lives and returns on public investment. Population aging brings positive direct effects on growth and welfare. Finally, we numerically find an inverted-U-shaped relationship between population aging and growth and welfare because the direct and indirect effects of population aging coexist.departmental bulletin pape