Population age structure and savings rate impacts on economic growth: Evidence from Australia

This paper examines the relationship between the dependency ratio, savings rate and real GDP for Australia for the period 1971-2014. Three econometric techniques - dynamic ordinary least squares (DOLS), fully modified ordinary least squares (FMOLS) and the vector error correction model (VECM) - are applied to estimate the relationship. The interaction between the variables in the post-sample period is also forecast using impulse response functions (IRFs) and variance decomposition (VDC) analysis. Each of the three models confirms, to varying degrees, the long-run relationship between the dependency ratio, savings rate and real GDP; however, Granger causality tests do not show any significant short-term relationship among the variables, other than a one-way causality running from the dependency ratio to GDP per capita. The IRFs show the negative response of dependency ratio on GDP per capita, and that this response dies out gradually. In addition, the VDCs forecast the impact of this shock in the dependency ratio on GDP per capita as accounting for, on average, 9% of the total variance in the initial four years and 23% over the next 11 years. The overall result implies that changes in population age structure had a significant impact on real GDP per capita in Australia. However, this advantage of the age structure may disappear in the near future due to the projected rapid increase in the dependency ratio as a result of ageing of the population. This outcome may lead to a slowdown in the GDP growth. Australia needs demographic and immigration policies that involves increasing the skilled working age population to counterbalance the problems associated with an ageing population. (C) 2016 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.