Populations in many OECD and emerging economies are ageing rapidly and this will have significant macroeconomic impacts, including on public expenditures and tax revenues. The rules and practices that govern fiscal relations among different levels of government, such as their responsibilities for taxation, spending and debt management, have a bearing on economic efficiency and ultimately on growth. Understanding how demographic changes interact with these practices to affect fiscal risks at multiple levels of government is critical for policymakers to prepare for and improve outcomes.

The collection of analyses in this volume draw from an expert workshop in Paris of the OECD Network on Fiscal Relations across Levels of Government in 2019, organised jointly with the Korea Institute of Public Finance (KIPF). The Network is a unique body at the OECD that “horizontally” brings together the expertise of multiple fields and four substantive departments – the Centre for Tax Policy and Administration (CTP), the Economics Department (ECO), the Public Governance Directorate (GOV) and the Centre for Entrepreneurship, SMEs, Regions and Cities (CFE) – as well as their respective committees (the CFA, EPC, PGC and RDPC). The Network, chaired by Junghun Kim of Korea, addresses a wide range of challenges for intergovernmental fiscal relations, whether macroeconomic, structural and administrative, and seeks to contribute to stronger, fairer and more stable economies as well as improving the well-being of citizens.

All OECD economies are undergoing population ageing – an increase in the share of older persons in the population – reflecting a combination of increasing longevity and declining fertility rates. The process and pace are, however, far from uniform, with ageing much more advanced in some countries than in others. Moreover, the implications on public spending, revenues and debts vary not only across countries, but also within countries, across levels of government, with many local and regional governments facing particularly heavy spending burdens as their revenue bases decline. Such burdens are especially intense in the context of the COVID-19 pandemic that puts extreme pressure on shared health systems, public safety, social care and many other locally delivered public services.

Populations in OECD countries are ageing rapidly, which will have significant macroeconomic impacts, including on public expenditures and tax revenues. This chapter analyses the consequences of population ageing at the sub-central government (SCG) levels and introduces the “SCG fiscal vulnerability to ageing” indicator. This indicator identifies the countries in which SCGs on average are vulnerable to the ageing of their population from a fiscal perspective (both from the expenditure and revenue side). The chapter posits that the economic and fiscal consequences of an ageing population go beyond the central-SCG boundaries. Therefore, in order to make fiscal frameworks “ageing resilient”, countries require a coherent fiscal strategy that focuses on tax and spending reforms, with a whole-of-government approach that brings together central governments and SCGs.

OECD countries and their regions are ageing fast. In principle, the negative impact of ageing on the growth of per capita gross domestic product (GDP) could be offset by increases in productivity. However, for many regions, the actual growth rates recorded have been lower than productivity growth required to maintain per capita GDP levels in recent years. One reason for this is that ageing also has a direct negative impact on productivity growth, with the effect being concentrated in urban areas. Part of the explanation is that cities specialise in sectors such as tradable services, where the content of tasks makes it difficult to automate the production process, and where business dynamism – negatively affected by demographic change – is a key driver of productivity growth. Finally, ageing seems to be associated with a redistribution of revenues away from workers, towards capital and firm owners.

Population ageing is a global phenomenon, and Western European welfare states, in particular, are ageing at a rapid pace. Still, not all states or even regions within a given country are ageing in the same way, and we find significant differences among them. While some metropolitan areas are attracting younger inhabitants and are even growing, peripheral areas are suffering from out-migration and rapid ageing. In federal countries, these demographic differences create challenges across levels of government, and the variation in the cost and revenue structures of these levels should be taken into account. There are also considerable differences among states or municipalities due to diverging demographic developments. In this chapter, we present age profiles of government revenues and expenditures per capita for the federal, state, and local governments, and use the population projections for the different German Länder to examine how demographic changes affect budget gaps at each level of government. The results show the long-term fiscal implications caused by different ageing patterns. As out-migration reinforces economic fortunes, a compensatory factor in the fiscal equalisation scheme among the Länder is discussed.

The People’s Republic of China is facing a “population ageing tsunami”, with the share of the population aged over 65 expected to double between 2010 and 2030. Reforming the social security system to improve coverage, sustainability and equity is an urgent task for the government. This chapter examines the workings of the Urban Employee Scheme (UES), the main pension programme currently covering more than 400 million workers and retirees. Although nominally a national programme, the UES is a patchwork of pension pools, managed mostly at the city and county levels. Under fragmented management and weak oversight, the system is rife with underpayment and evasion and has stymied previous efforts by the central government to promote consolidation. This may finally change under top-down reforms implemented since 2013 that have strengthened governance and enforcement capacity. Improving equity and the long-term sustainability of the UES will also require extending coverage to younger migrant workers and strengthening their incentives for participation.

This chapter presents future public spending projections for Brazil as a result of the demographic transition. The end of the demographic dividend, which will be followed by population ageing, will affect spending on health, education, social programmes and social security, including pensions. Health spending will increase significantly in absolute terms but should maintain its share as a proportion of gross domestic product (GDP). Education expenditure will decline. As education spending in Brazil is determined by the level of education, the reduction in spending will not be linear, and will affect all levels of government. The biggest challenge will be the payment of social security benefits, putting at risk the sustainability of the government finances. Therefore, the most urgent task for federal, state and municipal governments is to pursue comprehensive social security reforms that will guarantee basic government functions in the coming years.

Transfers from Canada’s federal government to provinces, territories and local governments account for about one-fifth of the revenues of those governments, and about one-third of federal programme spending. While central governments in federations typically raise more, and sub-central governments typically raise less, than they spend directly, large gaps and transfers to bridge them strain the federal principle that governments at each level are sovereign in their respective spheres. Transfers can help achieve national-scale public goods, address spillovers among provinces, and support minimum standards for public services and other programmes across the country – yet Canada’s present system does not consistently reflect these purposes. The potential of large transfers to undermine accountability and foster unsustainable fiscal policies should inspire caution about their current size, and discourage expanding them. Demographic change will dampen the growth of government revenues in Canada and push programme spending up, particularly at the provincial level. Responding effectively will require a mix of tax increases and spending restraint from provinces and ideally partial pre-funding of programmes such as drug treatments and long-term care. Such reforms are likelier if the federal government limits growth in intergovernmental transfers, and reduces its draw on common revenue bases – the consumption base in particular – that the provinces will likely need to exploit more in the future.