Can aging population affect economic growth through the channel of government spending?

Abstract

The demographic transition toward an aging society is a global phenomenon. An increase in the aging population directly challenges the government positions and public expenditures as it directly affects a country's aggregate demand and, thus, the country's income level. This paper investigates the impact of an aging population on the size of government spending. Using an updated dataset of 87 countries from 1996 to 2017, we study the aggregate level and each composition of government expenditures. Furthermore, we investigate whether the aging population influences the allocation of government spending toward different categories and economic growth changes. The paper uses the generalized method of moment (GMM) model for the dynamic panel data analysis to address the endogeneity problem. Our main findings suggest that an increase in the old-age population significantly induces higher aggregate government spending but only in developed countries and in particular on the spending in the social protection and environment categories. However, the aging society leads to lower government expenditure on education. Other critical findings reveal that changes in some compositions of government spending toward cultural expenditures impact growth slowdown, while an allocation toward education spending positively impacts economic growth.