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Population Ageing Threatens Fiscal Sustainability - Whether r > g or r < g
Westerhout,Ed
Westerhout,Ed
Abstract
A popular view is that one should not worry too much about the sustainability of fiscal policies if r < g, e.g. if the interest rate on government bonds is lower than the rate of economic growth. This paper argues that this view is too optimistic. If the current interest rate is below the rate of growth, this may well be reversed, in the near or distant future. Even if this does not happen, the level to which the public debt ratio will converge may, due to population ageing, be unsustainably high. Accounting for the empirical fact that the interest rate on government bonds is increasing in the public debt ratio further increases the risk of fiscal unsustainability. Numerical simulations indicate that it is very unlikely that public debt ratios will stabilize at sustainable levels if current fiscal policies remain unchanged.
Description
CentERlab Discussion Paper Nr. 2025-015
Date
2025-11-17
Journal Title
Journal ISSN
Volume Title
Publisher
CentER, Center for Economic Research
Files
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2025-015.pdf
Adobe PDF, 1.74 MB
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Keywords
Generational Accounting, Debt Sustainability Analysis, Population Ageing, Sustainability Gap, H68 - Forecasts of Budgets, Deficits, and Debt, J11 - Demographic Trends, Macroeconomic Effects, and Forecasts, SDG 17 - Partnerships for the Goals
Citation
Westerhout, E 2025 'Population Ageing Threatens Fiscal Sustainability - Whether r > g or r < g' CentER Discussion Paper, vol. 2025-015, CentER, Center for Economic Research, Tilburg, pp. 1-46.