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The Fiscal Importance of Long-term Care in Norway

2012 Conference Presentation

Economics Norway

7 September 2012

The Fiscal Importance of Long-term Care in Norway

Erling Holmøy, Statistics Norway, Norway
Julie Kjelvik, Statistics Norway, Norway
Birger Strøm, Statistics Norway, Norway


According to population projections the long run growth in the demographic dependency ratio is likely to be more moderate in Norway than in most other OECD countries. However, due to relatively generous welfare schemes, it is expected to cause a relatively strong adverse effect on government finances.

Based on simulations on a long run model of the Norwegian economy, this paper analyses how population ageing may affect the resources allocated to long-term care in a 50 year perspective, emphasizing the fiscal importance of public provision of these services. About 85 per cent of the long-term care expenditures have been financed by taxes in Norway. If this share of tax financing is prolonged, how will the future growth in the long term care sector contribute to the necessary rise in the total tax burden under different assumptions regarding health status and service standards? Our simulations are based on the most recent population projections, and the gender specific age profiles of both the user rates and the costs per user are based on the most recent available micro data. We distinguish between home services and services provided in institutions.

Compared to partial models of the costs in the long-term care sector, our general modelling approach allows us to account for other fiscal effects of long-term care than the pure cost effect of providing long-term care for more elderly. Specifically, the payroll tax on government employees will not generate any net government revenue. Moreover, long-term care is not subject to any indirect taxation in Norway. Consequently, reallocation of labour and other resources from private industries to long-term care reduce the tax bases. By comparing several scenarios, we estimate the partial effects of increased life expectancy, combined with different assumptions on the health status of the elderly, including red-herring and compression of morbidity. In particular, we examine the importance of isolating death related costs, which will be delayed as individuals live longer. We also study different scenarios of the use of long-term care among individuals below 67 years of age.

Over the last decade Norway has witnessed a considerable increase in the number of young recipients of home-based long-term care services, and the costs per user is on average higher for younger than for older users.