Summary of the Paper

“Generationengerechte Finanzpolitik: Grundsätze, Analyse und politische Forderungen” (Intergenerationally Equitable Financial Policy: Principles, Analysis, and Political Demands). Published in 2002 in German

When it comes to the topic of financial policy, politicians and journalists often speak of the future, however concrete contemplation of intergenerational equity is the exception to the rule. This paper puts forward comprehensive principles for intergenerationally equitable financial policy, and covers revenue and expenditure policy as well as the topic of debt. However, this paper goes methodically beyond solely contemplating the isolated fiscal effects of financial policy; non-fiscal effects are also contemplated with regard to intergenerational equity as well as the consequences of modest future-oriented expenditures.

The principles for expenditure, revenue, and debt policy ensue from the hypothesis that subsequent generations must have at least as much opportunity to satisfy their needs as previous ones. Expenditures are to be structured in a manner that at least preserves ecological, social, and real capital, while providing young people sufficient education. The following principle holds especially true for revenue policy: the profiting generation is principally responsible for financing public benefits (exceptions form intergenerational pacts).

With the aid of these principles, this paper examines seven widely accepted arguments often stated in support of public debt for intergenerational equity. The result: there is practically no legitimate reason for cross-generational debt with the exception of unusual burdens. The most common argument states that new debt is offset by investment with positive future payback. However, if new debt is authorized equal in sum to activated investment, the funding of the investment object is completely shifted into the distant future, although this object provides its utility immediately upon completion. While the expense of an investment (and respectively the interest debt) increases with time, the value of the investment object depreciates. Moreover, it is unjust to include subsequent generations in the expense of contemporary investments if they don’t receive financial compensation for the effective cross-generational burdens of current behavior (e.g. for long-term environmental damage or for the violation of the intergenerational education pact). Furthermore, there are few investments that provide utility over more than one generation (30 years), since comprehensive maintenance to the sum of new investments are then usually required.

Over and above that, an intergenerationally equitable financial policy requires that from generation to generation, real capital be at the very least preserved - a task to be fulfilled by the respective current generation. Not even in the case of high educational expenses is debt justified, because education is an obligation guaranteed by an intergenerational pact, which means that in case of debts a future generation has to pay the debts of its father`s generation and according to the pact the education of the following generation.

Debt has a multitude of cross-generational consequences. If an outstanding public debt is not repaid, subsequent generations end up paying infinite interest for past benefits over an infinitely long period of time. In the present, debt and the resulting burden of interest lead to overproportionate reductions in those expenditures which would have future utility. From the pressure of debt arises the compulsion for economic growth with fatal consequences for the environment and market economy.

The political demands for an intergenerationally equitable financial policy aim at stopping the premature usage of subsequent generations’ resources and at reducing outstanding debts methodologically. For that purpose, debt as a financial instrument is to be legally ruled out with two exceptions: firstly, debt for concrete investment projects with prescribed repayment within the period of use should be permitted with strict limitations; secondly, liabilities may be permitted for unusual financial burdens arising from unexpected situations, which, as a rule, do not occur in every generation. Anti-cyclical economic policy may only be financed through reserves, and not through debt.

Furthermore, it is necessary to establish as legal requirement that real capital be at the very least preserved, that ecological capital be protected, and that education be organized such that young people and subsequent generations have at least as much opportunity as their parents did. In this manner, the restructuring of national finances by measures that violate intergenerational equity should be prevented. Further demands ensue for the transparency of national finances and the efficient implementation of funds, as well as with regard to revenue and expenditure policy.