Is government debt a burden on future generations?

The Treasurer, Joe Hockey, concluded his Budget speech and its agenda of cuts with an appeal to think of the next generation of Australians:

But unless we fix the Budget together, we will leave the next generation a legacy of debt, not opportunity.

As Australians, we must not leave our children worse off.

The Treasurer is talking about government debt. But is it really a burden on future generations?

Actually, no. In this admirably brief and clear article, Robert Skidelsky explains that while fears about one's own debts and legacies run deep, it really is wrong to apply them to government debt.

Says Skidelsky:

the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had
Read more at http://www.project-syndicate.org/commentary/does-debt-matter#1PgjEUp3Mb2hH1w5.99

the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had
Read more at http://www.project-syndicate.org/commentary/does-debt-matter#1PgjEUp3Mb2hH1w5.99

The national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

There are two sides to a debt. On one hand, it's a financial liability to the debtor. On the other, it's a financial asset to the creditor. That's the same for government debt (issued in the national money, as government bonds), which is a financial liability for the government, and a financial asset for bond-holders (and if you don't own a government bond yourself, you're probably in a super fund that does).

The practice of governments is to issue bonds that pay interest and, as Skidelsky says, this stream of interest income to the next generation of bond-holders, particularly if the Government feels the need to balance it with tax revenues, may be 'disagreeable' as a matter of the equitable distribution of income throughout society.

But the Government, as the issuer of a sovereign currency, is always able to pay this interest: as we discussed recently, it cannot run out of money. And for that reason, the Government could, as an alternative to issuing interest-bearing bonds, simply spend by issuing currency (that is, crediting the bank accounts of payees, via banks' reserve accounts at the Reserve Bank).

Spending, of course, has two sides too. Money spent by the Government is money received as income by the private sector. In the name of 'saving' money (that it cannot run out of), the Budget will reduce income to the private sector by the equivalent of 1.3 per cent of GDP relative to last year; that's $20 billion taken out of an economy that is growing below trend and in which labour is underemployed, and in which there are useful and productive things to be done and investments to be made. But with less money, as Skidelsky observes, less of that will happen, to the disadvantage of future generations.

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It should be said: the Budget papers do not envisage such a reduction in activity in the wider economy. But if government spending is reducing, the Government's forecast levels of production can only be met by... a huge expansion of private debt. But can households – real households, not fallacious ones – incur much more debt, on top of their already massive burden of past promises to repay?

(Source: RBA Chart Pack – Household Sector.)

the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.
Read more at http://www.project-syndicate.org/commentary/does-debt-matter#1PgjEUp3Mb2hH1w5.99