An Analysis of the Debate on Intergenerational Equity and Fiscal Sustainability in Australia

I. Introduction The Charter of Budget Honesty Act 1998 requires the Treasurer to publish an Intergenerational Report (IGR) at least once every five years. The aim of the report is to assess the long-term sustainability of current Commonwealth government policies over the next 40 years, including accommodating the financial implications of demographic change in Australia. In Australia, in common with many other developed and developing countries, there is growing concern about rising cost of public programmes, particularly public health, aged care and social security. Several factors account for this concern. Perhaps the most important is technological advancement, which is raising the unit cost of medical treatment and greatly extending longevity. Demographic change, arising from declining fertility and rising longevity, is also an important factor. The concern is that the public cost of supporting retired people will lead to exaggerated tax burdens on future generations. The IGR was tabled as Intergenerational Report 2002-3: Budget Paper No. 5 on 14 May 2002. It is thus appears timely to explore the long-term issues of intergenerational equity and fiscal sustainability, and to identify policies that may assist in ensuring that the Australia adopts a `sound' fiscal policy for current and future generations of Australians. The paper itself is divided into six main sections. Section 2 discusses the meaning of the concept of intergenerational equity. Section 3 examines the problematic nature of generational accounting. Section 4 deals with generational accounting in Australia and especially the work of Ablett (1998; 1999). Section 5 focuses on the various approaches to fiscal sustainability. Section 6 reviews the manner in which intergenerational factors are tackled in the intergenerational reports of some advanced countries, including Britain, Canada, New Zealand and the United States. Finally, section 7 outlines various policies that can assist Australian governments in achieving intergenerational balance in future. 2. Intergenerational Equity A fundamental principle of intergenerational equity is the benefit principle. According to this proposition, taxpayers of each generation should (as a group) contribute to public expenditures from which they derive benefits in accordance with their share of those benefits. In other words, they should `pay their way', without either subsidising, or being subsidised by taxpayers in other time periods. This approach provides for contemporaneous taxation of any expenditure the benefits of which are enjoyed contemporaneously (Robinson 1998: 447 and Musgrave 1988: 133). Intergenerational equity can be contrasted with intra-generational equity, the latter being concerned with the distribution of income within a generation. Intra-generational equity does not adhere to the benefit principle. Following this view, income is redistributed on equity grounds so that all citizens should enjoy some minimum standard of material well being irrespective of their capacity to generate income. Intergenerational equity can also be seen in terms of the distribution of tax burdens across generations according to their capacity to pay taxes. If per capita incomes rise over time, then there is a case for present generations to shift some tax burden to future generations. Musgrave (1988) regards this as being an optimal distribution, which can be distinguished from the distributionally neutral (and narrower) concept of benefit finance. Intergenerational equity calls for initial debt finance to be followed by debt amortization over the useful life of the asset. This involves the decomposition of the budget between current and capital expenditure, with the former being tax and the latter being debt financed. This raises the issue of the definition of a capital outlay. For public assets there is no useful analogy with ownership as it is employed in the accounting concepts of the private sector. …