July 25, 2007

Fiscal prefunding in response to demographic uncertainty

Uncertainty in demographic developments lowers expected future welfare levels.

Increasing current tax rates and decreasing expected future tax rates may compensate part of the welfare loss that is due to demographic uncertainty. In doing so, the government effectively pursues a precautionary fiscal policy analogous to the precautionary life-cycle saving behaviour that households may exhibit in the presence of income uncertainty.


Alex Armstrong
Nick Draper