Long run effects on government finances and national income in Norway of changes in fertility

All long run projections show that Norway faces severe fiscal sustainability problems after 2025. Some have claimed that increased fertility will mitigate these problems. Measured by cross section data on birth rates, fertility declined from 2.75 to 1.75 children per woman during the period 1968-1977. After 1977 this fertility rate has varied little around 1,8. This report studies macroeconomic effects in Norway, emphasizing fiscal effects, of permanent changes in fertility.

As a first necessary, but not sufficient, approach we demonstrate that higher fertility rates imply a lower demographic support ratio: The ratio of persons in the working ages 20-66 to the rest of the population declines in the first 65 years following a permanent increase in birth rates. After 65 years this support ratio is approximately invariant to changes in fertility rates in the interval 1.5 – 2.1. Regarding population dynamics, 65 years is a rather short period. The result is a consequence of slow but rather certain processes.

Another key element in our analysis is the average contribution from a native to government revenues and expenditures during the life course. We find that the lifetime contribution to expenditures (tax financed services and cash transfers) exceeds the corresponding contribution to tax revenues by about 8 million 2017-NOK, provided prolongation of the present labour market behavior, welfare schemes and tax rules. We assess that the use of the petroleum wealth according to the fiscal rule can pay about half of this tax bill.

The information about demographic trends and age specific fiscal contributions from individuals enter the model system DEMEC, which we use to estimate the effects on economic growth and government finances caused by permanent changes in birth rates from 2018. The main conclusion is that an increase in birth rates has small negative effects on national real income per capita and fiscal sustainability in the first 65 years. The yearly impact on fiscal sustainability is substantial this period, however. Thereafter these effects are negligible. The main explanation is that the relative growth in employment gradually becomes equal to the population growth over these years. The strongest effects are seen in in the 2040ies, reflecting a strong increase in the number of children and youths, whereas the positive employment effect is still very small. In the long run, i.e. towards 2100, per capita figures of both national income and government revenues are increasingly influenced by the simple fact that that the returns from the petroleum wealth fund, declines in per capita terms.

Fiscal effects are conceptually different from effects on social welfare. However, results in our report should be of interest as fiscal sustainability problems due to aging is gradually expanding in Norway.