Demographic Transition and its Impacts on Fiscal Sustainability in East and Southeast Asia
Demographic transition does not have a direct effect on government balance, but instead has an indirect effect through higher government expenditure.
Many economies in East and Southeast Asia are progressing toward becoming aging or aged societies. The impacts of this demographic transition are multifaceted and far-reaching and include declining tax revenues, leading to fiscal imbalances, and possible increases in government expenditures for coping with care expenses and pension schemes. We provide insights into ways to balance fiscal revenue against costly pension and social security systems and increasing healthcare expenditures.
Using panel data for 178 countries across 18 years to capture the state of fiscal balance and data on demographic transition, we estimate three models to analyze the relationships between (i) demographic transition and government balance, (ii) demographic transition and government health expenditure, and (iii) demographic transition and government debt. The results first establish that health expenditure is negatively associated with the government balance. Then, for the relationship between demographic transition and health expenditure, old-age dependency and the share of the population aged over 64 shows a significant positive relationship with health expenditure. We find that demographic transition does not have a direct effect on the government balance, but instead has an indirect effect through higher government expenditure. This can be explained by the high costs of treating health conditions related to old age, including chronic illnesses.
Our findings provide important implications for fiscal sustainability and necessitate comprehensive reviews of public health spending; healthcare reforms that prioritize accessibility for all and efficiency in healthcare services; and cost-sharing measures to mitigate the age-related fiscal burden. These measures will be particularly important in dealing with the impacts of the coronavirus disease (COVID-19) pandemic, to which the elderly are particularly vulnerable.
WORKING PAPER NO: 1220