Population Ageing, Economic Growth and the Composition of Government Expenditure

This paper investigates how population ageing affects economic growth by altering the composition of government expenditure. We develop and test an original political economy model in which an aging population shifts the preferences of the median voter, leading to increased elderly spending at the expense of private investment,
thus reducing growth. The model yields three predictions: population ageing (i) raises elderly spending (as a share of output); (ii) does not significantly affect productive expenditure; and (iii) lowers economic growth. Using OECD data from 2007-2018 and both OLS and IV regression analyses, we find strong support for prediction (i): population ageing significantly increases spending on “old age”
and “hospital services.” Consistent with (ii), there is no significant impact on “tertiary education,” “transport,” “communication,” or “R&D.” Finally, using GMM-based estimation with a broader sample of 178 countries, we confirm prediction (iii): health care expenditure negatively affects growth.