Ageing, education spending, and growth: why higher taxes do not always promote growth

This paper examines how population ageing and education policy affect innovation and economic growth in an R&D-based growth model. Population ageing reduces the size of the research workforce, potentially slowing innovation and long-run growth. At the same time, public R&D spending remains persistently low across many OECD countries, while governments increasingly rely on education expenditure as a growth policy. However, cross-country data show no clear positive relationship between tax rates and economic growth. To explain this puzzle, we extend a standard R&D-based growth model by introducing a fiscal structure in which governments finance education expenditure through tax revenues and revenues from expired patents. Under a balanced-budget regime, ageing slows technological progress by shrinking the research workforce and increasing the relative importance of revenues generated by existing technologies. This mechanism raises the equilibrium tax rate while reducing innovation. The growth effect depends on education productivity. When education productivity is high, increased education spending enhances human capital accumulation and sustains economic growth. When productivity is low, reallocating labour towards education reduces innovation and slows growth.