Sunday 31 May 2015

Does Government Debt Actually Harm Future Generations?

Tom Goldsworthy
The USA's national debt, visualised if it were in stacks of cash.

Does government debt harm future generations, as it is often argued? Government borrowing is argued to be immoral because of the supposed burden it places on our children, and our children's children, and so on.  Higher debt-financed consumption today makes future generations poorer tomorrow, so the argument goes.  An article in the Telegraph last year entitled, 'It's time to come clean about our national debt' used this very same argument.  Liam Halligan, the article's author, said:

"Why should we borrow so much, foisting our profligacy on our children and grandchildren...A spiralling national debt isn't only bad economics, but is also morally repugnant."

Unfortunately, many would point out that the economic logic behind the above argument does not completely hold.  In theory, government debt need not necessarily leave future generations any worse of at all overall - net.  This is because, for every pound the government borrows, there must be someone on the other side lending that money.  So, assuming all government debt is held only domestically, the 'burden' on future generations will be zero.  While some parts of the population will pay higher taxes to service the debt, another section will receive interest payments for lending the government that money in the first place (and these two groups are likely to overlap).  Of course, there are many other reasons that excessive government debt may be undesirable in terms of its effects on future generations, not least the distributional consequences, but in terms of the question of a net burden on society, the case does not hold.

Having said that, around 1/3 of government debt is in foreign hands, and so there will be a net 'burden' on society in the future to an extent.  The assumption that all government debt is held domestically is not completely accurate in Britain.  

Although, even then the argument over whether government debt burdens future generations is not settled.  It depends on how the government spends the money it borrows.  If it is being used to finance short-term consumption, then, yes, the fact that around 1/3 of our debt is foreign owned will mean that we are enriching ourselves at the expense of future generations. But, if the money is used to finance vital, beneficial long-term investments in, say, infrastructure, then future tax payers will feel the benefits of that spending, as well as the costs, and so not necessarily be worse off overall.

So, while in theory government debt needn't leave a net burden on future generations, in reality it probably will to an extent.  However, as shown, when government debt is domestically held (as 2/3 of British government debt is), hyperbolically stating that government borrowing is 'morally repugnant', irresponsible and so on, is clearly a huge exaggeration.  As the economic logic shows, the majority of British government debt will, in fact, not leave future generations worse off.

Tom Goldsworthy is the founder and editor of The Economic Viewa blog that aims to provide the 'economic view' on current events, analysing topical issues with the economist's toolkit. 
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