A national government that issues its own currency is not revenue-constrained. However, inflation may render it impossible for the government to use budgetary policy to meet the nominal demands for pensions and health care by an increasing proportion of the population.
Answer: True
The answer is True.
The question explores the real constraints on the provision of pensions and health care rather than the false financial constraints that the mainstream choose to make as the centrepiece of the intergenerational debate. So there is resonance in this question with Question 2 and the answers complement each other.
Governments in most advanced nations are facing a major medium- to longer-term challenge with respect the demographic change. A rising proportion of their populations will require retirement pension assistance of some kind and it is likely (but not inevitable) that health care outlays will also rise in line with the ageing population.
There is no doubt that dependency ratios are rising. The usual construction of the dependency ratio is as 100*(population 0-15 years) + (population over 65 years) all divided by the (population between 15-64 years). This clearly rises when the birth rate falls and the population remains alive for longer. In the blog - Another intergenerational report - another waste of time - I consider why this definition is inadequate.
The key point is that we are really wanting to focus on the changes in active workers relative to inactive persons (measured by not producing national income) over time, which the definition above clearly fails to do. So the effective dependency ratio recognises that not everyone of working age (15-64 or whatever) are actually producing. There are many people in this age group who are also "dependent". For example, full-time students, house parents, sick or disabled, the hidden unemployed, and early retirees fit this description.
This depiction, is in itself, biased because it only focuses on activity in relation to being engaged in paid work. For example, major productive activity like housework and child-rearing is ignored by a focus on paid work only.
We should also count the unemployed and the underemployed within the "dependent" category although statisticians count them as being economically active. While dependency ratios will rise (however defined) if the population ages, governments have deliberately maintained persistently high pools of underutilised labour resources and have therefore heightened any challenges that will emerge from the rising dependency ratios.
So the only relevant question about the ageing population and the challenges for governments relates to whether the rising dependency ratio will reduce the growth of production of real goods and services in the future and therefore reduce material standards of living.
The mainstream debate chooses to focus on the "financial" aspects of these projected changes arguing that they will imply rising budget deficits which they define as being unsustainable. Of-course, their use of the term unsustainable is circular - true by definition and without any application to a modern monetary system where the sovereign government issues its own currency.
Please read the following blogs - Fiscal sustainability 101 - Part 1 - Fiscal sustainability 101 - Part 2 - Fiscal sustainability 101 - Part 3 - to see what fiscal sustainability means.
The mainstream emphasis on "costs" of retirement pension and health care systems and how these "costs" will "blow the budget deficits out" demonstrate how far of the mark they are in providing relevant commentary.
The "budget costs or outlays" are financial not real constructs. Once a person enters the intergenerational debate in this way - financial rather than real - you know they do not understand the true nature of the issue they are discussing.
The relevant issue relates to real resource availability in the future.
There will be no financial constraints on any sovereign government running deficits in perpetuity should that be the appropriate macroeconomic policy setting (in relation to the behaviour driving the other sectoral balances). Ultimately, these deficits are endogenous which means they are driven by the non-government sector spending. If the latter wants to net save as an overall sector then the government sector has to run deficits for growth to be stable.
An ageing population will require choices to be made in relation to real resource trade-offs. Will there be enough real resources available? This is not a financial matter - it is a matter of whether there will be real goods and services produced in sufficient volumes for us and the government to buy in the future. If there are real goods and services produced in sufficient quantity to allow for adequate health care and pension entitlements (the former using resources, the latter commanding them) then the sovereign governments will always be able to afford to purchase them and provide them to our advantage.
How these real resources are distributed in the future becomes a political issue. The outcomes in the future will be resolved by political means in similar ways to now. But financial constraints will never be binding on a government with a political mandate to pursue high quality health care etc.
Clearly, if there are finite real resources then choices have to be made about what gets produced and provided. The question focuses on this issue.
If total spending in the economy including the rising pension and health care spending exceeds the real capacity of the economy to meet this demand with output then inflation becomes the issue.
To reduce the danger of this occurring in the face of rising dependency ratios, productivity growth is essential. This is why the neo-liberal approach to the problem which pressures governments to run budget surpluses now (erroneously characterising this as "saving for the future") is so dangerous.
Resource availability in the future will be enhanced by the research and development that is done now. Mainstream remedies to perceived budget blow-outs typically manifest as cuts to education, for example. Nothing could be more stupid.
Further, maximising employment and output in each period is a necessary condition for long-term growth. The emphasis in mainstream intergeneration debate that we have to lift labour force participation by older workers is sound but contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment.
Anything that has a positive impact on the dependency ratio is desirable and the best thing for that is ensuring that there is a job available for all those who desire to work.
Further encouraging increased casualisation and allowing underemployment to rise is not a sensible strategy for the future. The incentive to invest in one's human capital is reduced if people expect to have part-time work opportunities increasingly made available to them.
You might like to read these blogs for further information: