A simulation model of the fiscal effects of immigration, fertility and employment

Robert E. Rowthorn, University of Cambridge

This paper uses a simple simulation model to examine the fiscal consequences of ageing in a low fertility, low employment economy. It explores how employment growth, fertility and immigration influence the tax rates required to ensure government solvency. It identifies the pitfalls involved in using “generational accounting” in a low fertility, low employment economy. Although highly stylized, the model provides valuable insights and indicates the orders of magnitude involved in various alternatives. The main conclusions are as follows. In the kind of economy considered, the fiscal gain from a higher rate of employment is much greater than the gain from immigration or a higher the birth rate. Moreover, the large fiscal gain from immigration that some researchers find is due to their unrealistic assumptions regarding the generational incidence of higher taxes. With more realistic assumptions, the fiscal impact of immigration is much smaller and of indeterminate sign.