Future Policy Problems: Old Age and Taxes, and the Monetary-Fiscal Clash

Abstract

Demographic trends will place increasing pressures on public policies, fiscal and monetary. An ageing society will require greater medical and pension expenditure, just as a declining workforce is slowing output growth, and hence taxable capacity. Goodhart and Pradhan consider four ways for enhancing taxable capacity:

• (i) Reforming the basis of corporation tax;

• (ii) Land value taxation;

• (iii) A carbon tax;

• (iv) Destination-based cash flow tax.

But Goodhart and Pradhan doubt whether politicians will be able to raise taxes enough to equilibrate the economy. Hence, inflation will rise. That will lead Central Banks to raise nominal interest rates in pursuit of their inflation targets. In turn, that will put them at loggerheads with Ministers of Finance and Prime Ministers/Presidents, especially those of a populist inclination. In any such conflict between politicians and Central Bankers, Goodhart and Pradhan would back the former to win—that conflict has already begun.