Population Ageing, Government Budgets, and Productivity Growth in Politico-Economic Equilibrium∗

We analyze the effect of changes in fertility and longevity on taxes, the composi-tion of government spending, labor supply and other macroeconomic outcomes. To that purpose, we introduce politics in an OLG economy with endogenous growth due to human and physical capital accumulation. Population ageing shifts political power from students and workers to retirees, leading to a reallocation of resources from education spending to retirement benefits. Calibrated to U.S. data, the model predicts retirement benefits as a share of GDP to strongly increase over the next decades and the education share to fall. This effect depresses annual productivity growth by ten basis points. In spite of higher labor-income taxes, per-capita labor supply rises, as a consequence of increased life expectancy. The political process allocates a much smaller share of resources to education than a Ramsey planner with balanced welfare weights. ∗For useful comments, we thank Enrique Kawamura and Fabrizio Zilibotti as well as conference an