The Implication of Ageing on the Fiscal Position in Malaysia

Abstract

The aged population in Malaysia has increased fast from 2000 to 2020. However, the implications of ageing on Malaysia's fiscal position still need to be clarified as the existing literature focuses on other fiscal aspects. This article examines the effect of ageing on government spending and government revenue in Malaysia in the short and long run using the annual data from 1990 to 2020. This paper applies the augmented autoregressive distributed lag bound (AARDL) test to determine whether the government spending and revenue equation is cointegrated. The AARDL method is believed to provide a more comprehensive examination of the cointegration properties. After the cointegration relationship is confirmed, the long-run and short-run implications of ageing are examined using the unrestricted error correction and error correction models, respectively. Estimating the government expenditure and revenue equations shows that cointegration exists. In the long run, an increase in the ageing population growth rate causes government expenditure and revenue to decrease. However, no robust evidence supports the statistically significant impact of ageing on both fiscal variables in the short run. The results suggest that the implication of ageing is long-run. Regarding policy implications, the Malaysian government needs to diversify income resources and implement stronger fiscal discipline to minimise the implications of ageing on its fiscal position.