Population Ageing: Implications for Economic Growth and Fiscal Sustainability

Population ageing poses significant challenges to economic growth and fiscal sustainability in advanced economies. This study examines how fiscal sustainability and labour force participation moderate the impact of ageing on gross domestic product (GDP) growth across 37 Organisation for Economic Co-operation and Development member countries from 1995 to 2023. We introduce a novel composite fiscal sustainability index that captures fiscal health through nine macro-fiscal indicators, integrating expenditure control, revenue adequacy, macroeconomic stability, and debt management. Employing a dynamic panel data approach with system generalised method of moments estimation, we address endogeneity and unobserved heterogeneity to derive robust causal inferences. Our findings reveal that a 1% increase in the share of the older adult population reduces short-run GDP growth by 0.31% and long-run GDP growth by 0.37%. Stronger fiscal discipline significantly attenuates the negative growth impact of ageing, mitigating the growth drag by approximately 0.077 percentage points in the short run. Moreover, higher labour force participation cushions the adverse effects of demographic shifts and positively contributes to growth in both the short and long run. These results underscore the crucial roles of sound fiscal governance and inclusive labour market policies in sustaining economic vitality amid demographic headwinds. The study offers actionable insights for policymakers to design integrated fiscal and labour market reforms that promote resilient, inclusive growth in ageing advanced economies.