Intergenerational Equity in Public Finance

Intergenerational Equity in Public Finance: Balancing Present and Future Generations'

Financial Interests in Fiscal Policy

Introduction

When governments make decisions about public spending, taxation and the level of public debt,

they must balance the interests of current taxpayers with future generations who will inherit

fiscal commitments made today. This paper examines the issue of intergenerational equity in

fiscal policymaking and debates around how to strike a fair balance between present and future

citizens.

The nature of fiscal policy is such that decisions made today will have consequences decades

into the future as governments commit to long-term spending programs and take on debt that

must eventually be repaid. However, politicians and voters tend to prioritize the interests of

current taxpayers who will experience the costs and benefits of policy changes in the short-term.

There is a risk that overspending or under-taxing today could leave future generations with

larger fiscal burdens to pay off accumulated debt or shore up underfunded social programs like

pensions and healthcare.

This paper will first define intergenerational equity and its importance as a principle for

sustainable fiscal policymaking. It will then explore some of the major debates around balancing

present and future interests, including arguments for austerity versus stimulus, the appropriate

level of public debt, and how to share costs between generations for long-lived public assets.

The challenges of making intergenerationally fair fiscal decisions will be assessed. Finally, some

policy options and indicators for monitoring intergenerational equity will be discussed.

Definition and Importance of Intergenerational Equity

The concept of intergenerational equity acknowledges that fiscal policy decisions made by

current governments will have multigenerational consequences due to the long-run impact of

spending commitments, debt obligations and tax rates on public coffers. Intergenerational equity

refers to the idea that each generation should bear an equitable share of the costs and benefits

associated with public policies over time, without one group being excessively burdened or

advantaged relative to others (Worrall, 2010).

There are a few rationales for why achieving intergenerational equity should be an important

goal of fiscal policymaking (Avellaneda, 2009). First, it promotes sustainable development by

not overcommitting resources that risk burdening future generations with unsustainable debt

levels or unable to fund important programs. Second, it upholds the concept of fairness between

generations since citizens of the future have no democratic say in today's fiscal decisions but

will still have to live with their effects. Lastly, respecting intergenerational equity helps maintain

trust and legitimacy in public institutions by not seen to favor short-term interests over long-run

sustainability.

However, in reality perfectly balancing present and future impacts is challenging given

uncertainties about economic and demographic conditions decades ahead as well as

democratic pressures on politicians to address current needs. Therefore, most analysts argue

that an imperfect but good faith effort toward intergenerational equity should be the goal of fiscal

policy. This involves considering long-run sustainability, consulting indicators of

intergenerational burden sharing and maintaining prudent debt levels but not jeopardizing

immediate welfare for speculative future concerns.

Balancing Present and Future Interests in Key Fiscal Debates

There are a number of ongoing policy debates where the tension between present and future

interests is pivotal:

Austerity vs Stimulus

In times of economic downturn, the short-term benefits of stimulus spending and tax cuts must

be weighed against the higher debt levels they create. Supporters argue stimulus boosts growth

and prevents long-run scarring, but critics argue large peacetime deficits are irresponsible and

saddle future generations with higher taxes. Most economists support short-run stimulus paired

with medium-run fiscal consolidation once recovery is secured to respect both goals. But

determining the right policy mix remains controversial.

Public Debt Limits

While debt provides financing flexibility, high debt service costs can restrict future fiscal space

and spending priorities. There are divergent views on sustainable debt thresholds, with some

arguing public debt below 60-80% of GDP supports long-run stability while others argue much

lower thresholds are prudent. Debt ceiling debates involve judgments about balancing short-

term needs with aspirations for fiscal security over many decades.

Intergenerational Asset Sharing

When governments undertake long-lived infrastructure investments, the question arises of how

costs should be split between present users and future beneficiaries. Full cost recovery through

user fees risks under-provision of benefits stretching many years, but taxpayer subsidies today

mean some costs are deferred to future budgets. Equitable cost sharing over time is challenging

to operationalize.

Pensions and Entitlements

Reforming spending on social insurance programs like pensions and healthcare engages the

question of responsibility for legacy obligations to current retirees versus sustainability for future

generations. Reasonable benefit adjustments or tax increases may be resisted if viewed as

reneging past promises but delaying changes risks larger long-run imbalances. Multi-decade

transitions are attempts to balance these interests.

Climate Change Mitigation

Abatement of carbon emissions and preparation for inevitable climate impacts involves

substantial upfront costs for benefits mainly enjoyed in a low-carbon future. Critically, decisions

to delay or underinvest in mitigation today are essentially imposing irreversible costs and risks

on later generations. Appropriately valuing intertemporal equity is part of justifying robust

climate policy (Somanthan et al., 2014).

As these examples illustrate, there are rarely straightforward answers when balancing the

financial claims on governments of present citizens versus future generations. But ignoring

intergenerational equity risks undermining long-run fiscal sustainability, trust in public institutions

and fairness across populations. Most analysts agree policy judgments should give serious

consideration to both proximate welfare and long-run aspirations for fiscal security and durable

prosperity.

Challenges of Making Intergenerationally Fair Decisions

While the importance of intergenerational equity as a guiding principle is recognized, applying it

through actual fiscal policy raises difficult practical and conceptual challenges (Gomez, 2018):

Valuing Future Impacts - Fiscal impacts decades hence are challenging to measure and

compare to present effects due to uncertainties about economic conditions, evolving priorities

and discounting long-run values. This limits the ability to incorporate future consequences

accurately into near-term decisions.

Establishing Representative Groups - Present generations have clear voting constituencies and

decision makers to advocate their interests, but future generations cannot directly participate in

the political process. It is difficult to define representative future stakeholders or weigh their

abstract interests appropriately.

Setting Time Horizons - Fiscal policy usually entails intertemporal tradeoffs over many decades,

yet budgeting and political cycles rarely span this long. It is hard to take a consistent

intergenerational perspective when short-run demands predominate decision making agendas.

Addressing Legacy Issues - Past fiscal choices have created entitlement programs and debt

stocks that constrain flexibility and are politically difficult to modify. Achieving greater

intergenerational balance may require accepting loss of benefits for some.

Limited Policy Leverage - While fiscal policy can broadly help or hinder future prosperity through

debt levels and investment choices, governments have limited capacity to guarantee outcomes

over multiple generations facing unknown economic and social changes.

These conceptual and institutional challenges mean attaining strictly equal and fair treatment of

present and future generations through fiscal arrangements is likely unachievable. But decision

making frameworks can still aim to uphold sustainability, consider long-run perspectives and

remedy obvious imbalances through the policy tools available. Multi-generational impact

assessments and concrete indicators of intergenerational equity can also help evaluate fiscal

choices.

Policy Options and Indicators for Assessing Equity

While intergenerational equity can be difficult to achieve perfectly, several options can help

incorporate future perspectives into fiscal policy and evaluate its distributional impacts:

Long-Run Budget Forecasts - Generating long-term (30-50 year) fiscal projections including

debt trajectories under different policy mixes allows scrutiny of sustainability and sensitivity to

assumptions. This sheds light on long-run fiscal impacts and risks.

Future Generations Commissioner - Some countries appoint non-partisan commissioners

explicitly tasked to represent future citizens' fiscal interests through assessments, consultation

and accountability requirements for considering future impacts in decision making.

Generational Accounting - This technique calculates expected net lifetime tax burdens across

generations to compare the fiscal.