Demographic ageing and sustainability of fiscal policy: projections with a renewed generational accounting model

An updated version of the Nederlandsche Bank's generational accounting model is used to assess fiscal sustainability. The model gives net lifetime taxes for current and future generations. In addition, the same model is applied to make forecasts of budget deficit and debt in percentage of gdp. Without additional policy, both indicators - generational inequality and the deficit/debt measures - point at fiscal unsustainability in the long run. The model is extended with a feedback mechanism between investment and labour productivity growth. With this endogenous effect included, a budget neutral increase of public investments leads to less inequality between generations and eventually to a lower increase in the deficit and debt rates.