Fiscal Sustainability and Generational Burden Sharing in Denmark

01-05-2001
DREAM

Based on generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy.

Abstract

Based on generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy. A strategy of tax smoothing is found to successfully distribute the financial burden associated with population ageing across generations, but this happens at the cost of a sharp increase in public debt along the transition path. This can be avoided if a strategy of debt smoothing is followed, but this shifts the financial burden onto current generations. A comparison based on a social welfare function indicates a marginal superiority of tax smoothing.