3.2 Fiscal sustainability and inter-generational equity
From an inter-generational perspective, government debt can be seen as an obligation passed from one generation of taxpayers to the next. The government's inter-temporal budget constraint, shown in expression (3), illustrates that for any terminal debt target a higher level of debt now will mean either higher taxation, or reduced government expenditure for future generations. Therefore, in the absence of offsetting behaviour by private agents, a higher level of government debt may imply a greater obligation passed from current to future generations (Auerbach, 2008). However, this analysis is complicated by several factors.
If each generation was to take the well-being of future generations fully into account in their saving and bequest decisions, the level of government debt would not have an impact on intergenerational equity as private savings and bequests would be fully adjusted to offset changes in government debt. Also, if future generations benefit from current government expenditure (eg, expenditure on long-lived assets such as infrastructure, or productivity-enhancing spending on education and skill development), then one might expect them to help fund it. Aiming to fund all such expenditure out of current taxation would in essence force current generations of taxpayers to subsidise government expenditure that benefits future taxpayers. Government debt allows those costs to be shifted to the generations of taxpayers that will benefit from the expenditure.
Another aspect to bear in mind is that the optimal level of government debt across generations cannot be assessed on the basis of economic analysis alone, as it also involves value judgements about how to weigh up the welfare of different individuals over time (Auerbach, 2008). If governments over time have an objective of ensuring a more equal distribution of resources between generations, then, if incomes are increasing over time, there may be a case to transfer resources from the young to the old. Increasing government debt may be one way of doing that. However, if the old are seen as being able to get less utility out of any unit of consumption as compared to the young, then that might suggest that fewer resources should be transferred to the old than is needed to equalise welfare across age groups (McDonald, 2005).
The Treasury has extended previous work undertaken on how taxation payments, government transfers and certain forms of government expenditure are distributed by income decile (Aziz et al., 2012) to show this breakdown by age, how it has changed through time, and how it may change in the future. Other forms of inter-generational analysis, such as the work by Coleman (2011) can also provide information to the government and the public about the nature and extent of generational transfers associated with particular fiscal programmes, such as NZS. Guest (2012) develops an overlapping generations model using New Zealand data to show the implications of tax smoothing (that is, increasing average tax rates in the short term and reducing them in the long-term) on different age groups. This work is being developed for application to the New Zealand data. These various studies will help inform governments of the intergenerational distributional implications of alternative fiscal adjustment options available to ensure fiscal policy programmes are financially sustainable.
