An IMF blog posted to its website on 7 August 2020 suggests that economies with a higher proportion of older people may gain less momentum from a fiscal stimulus compared to countries with a younger demographic. The blog is based on research from IMF working paper 20/92 published on 12 June 2020.

Many countries are introducing tax reductions and increased government spending to sustain their economies through the economic effects of the COVID-19 crisis. Even prior to the current crisis the importance of fiscal policy was increasing owing to the diminished scope for monetary policy in a time of very low interest rates. Fiscal policy may not however be as effective in stimulating economic growth in a country with an older population.

This view is based on research undertaken in relation to 17 OECD countries for the years 1985 to 2017. The countries were divided into two groups on the basis of the old-age dependency ratio (ratio of people aged 65 and over to those aged between 15 and 64). The aging economies had an average ratio of 26.5% whereas the non-aging countries had a ratio of 18.9%.

In the aging economies the labour force is not growing and public debt tends to be higher, with the consequence that fiscal stimulus has a weaker influence on private consumption and investment. The working age population is more likely to benefit from a fiscal stimulus through effects such as increased corporate hiring while pensioners tend to be on fixed incomes and their consumption remains steady or even declines gradually. An aging population may have lower labour input and productivity and a fiscal stimulus has less effect on private investment.

The authors point out that old age dependency ratios have been increasing for several decades and that within the next thirty years more than twenty countries in the world will have a ratio of more than 50%, which is unprecedented in world history. Some countries may even reach a ratio of 70%.

In the face of this challenge the authors of the paper recommend that in aging economies a larger fiscal stimulus may need to be considered when dealing with a recession. This may mean creating more fiscal space during economic upturns to allow for more spending and tax reductions in a recession.

Other policies such as measures to increase the labour supply could help to increase the effects of the stimulus. This might include measures to encourage the participation of women in the workforce or to encourage some immigration to meet the requirements of certain sections of the labour market.