“Intergenerational theft” has become a bit of a go-to phrase with members of the government these past few weeks as it tries to convince voters of the need for budget cuts. But the sense that government debt steals from future generations is a simplistic notion that ignores the long-term benefits of government expenditure and instead cares more about selling the political line that debt and deficits are always bad.



The suggestion that debt is intergenerational theft implies that as government debt needs to be paid back at a later date through taxes, debt taken out now is effectively being paid by future generations who don’t receive any benefits.



Earlier this week, Kelly O’Dwyer, the new parliamentary secretary to the treasurer, put a twist on the line by talking about debt in terms of “intergenerational fairness”.

She suggested that “the six budgets delivered by Labor over the period from 2008-09 to 2013-14” were “from an intergenerational perspective ... clearly the six most unfair budgets in Australia’s history” – because the debt will have to be paid by future generations.

To support this she noted that “during that period, Labor delivered $240bn aggregate in deficits, despite inheriting a budget in surplus”. O’Dwyer, of course, as is de rigueur with all conservatives, rather dismissed that little thing known everywhere else except Australia as “the great recession”.



She blithely suggested: “Yes, they faced the global financial crisis in 2008. But they also had the biggest terms-of-trade tailwind in the nation’s history, benefiting from an enormous commodity boom that was never going to endure.”



The problem with O’Dwyer’s economic history is she falls into the trap of thinking that increases in commodity prices must mean increases in company profits and thus increases in company taxes.



You can understand why she thinks this because this is what happened during the Howard government. But O’Dwyer might also remember that while commodity prices did boom after the GFC, so too did the value of our currency – which hindered the profits of our companies.



It meant that under the Labor government, company tax fell two years in a row during the GFC, and in only one year of its government did company tax grow by over 10% – compared with five of the last six years of the Howard government (2007-08 grew by “just” 8%):



And even now company tax revenue as a percentage of GDP is well below the levels seen in the last three years of the Howard government.

O’Dwyer’s whole thesis is contained in her assertion that “at the family level, most parents look to build some wealth to leave to their children and grandchildren so that they have an easier start in life. At the government level, Labor took the opposite approach.”



Except a government surplus is not national wealth.



Australia’s economy – and its wealth – grew substantially though the Labor government period. Indeed, when you compare our performance against other major economies, we did very well:



But was this performance achieved by stealing from future generations?

The debate – like much of the “debt and deficit” talk that dominates politics – often gets stuck confusing means and ends.

It’s like worrying about whether exercising is good because it will cause you to eat more to ensure you have the energy to exercise. The purpose of exercising is not to eat less, it is to be healthier. Similarly, the purpose of a government’s budget strategy should not be to have a budget in surplus and less debt, but (one would hope) to have a stronger economy.



And this is where the claims of intergenerational theft and fairness falls down.



If a government borrowed money purely to give to people who spent it on perishable consumption items at a time when the economy was already at near capacity, it would be a waste. It would just add to inflation, would have little if any lasting economic value and certainly future generations will be paying off that debt despite receiving no benefit.

But, as the economist Noah Smith notes, if the debt is used to finance “productive assets” say “building or repairing infrastructure, researching new ideas [or] improving schools” and if the return on those investments is actually higher than the “rate at which the government borrowed”, then future generations actually benefit from the debt we are incurring now.



The line from the government at the start of the GFC regarding the stimulus was “go hard, go early, go households”. In the 1980s and 1990s recessions, the reason was that the stimulus came too late and was not targeted properly enough to stop damage being inflicted.



A look at the falls in the percentage of prime-age workers in employment (25-54 years) during the 1990s and early 1980s recession and the GFC shows the difference:



Employment during the GFC declined at much the same rate as in the earlier two recessions, but it bottomed out and began to improve much sooner.



Was this theft on future generations? Well not if the people who kept their jobs were parents whose children were able to maintain their standard living; not if they attend a school which has a new building due to the stimulus, not if their house is one of the million or so which obtained insulation and thus will have lower heating and cooling costs in the future.



O’Dwyer is right to say that “at the family level, most parents look to build some wealth to leave to their children”. Without the GFC stimulus a heck of a lot more families would have been unable to do that – is that theft?



And there is also the opportunity cost of going into debt now.



Currently the Australian government 10-year bond rate is at record lows – even lower than during the GFC:



It is very cheap for the government to borrow money.

Let’s say a city desperately needs its rail system upgraded – maybe a tunnel. That infrastructure need won’t go away just because the government decides not to fund it. Instead it just kicks the responsibility along to a future government which will in all likelihood have to pay a higher interest rate on its bonds.



And of course any talk of intergenerational theft is hollow if you don’t also mention climate change. Not only will the costs of combating it be higher the longer we wait (and also take us closer to, if not past, the point where any meaningful action can make a difference), but the Abbott government’s actions in rescinding the carbon tax have provided future generations an added sting.



The cost of removing the carbon tax but keeping the compensation added around $7.4bn to the budget deficit over the forward estimates.



But when, inevitably, we adopt a carbon price in the future there will be an expectation of further compensation – because the current level of welfare will be considered normal and no longer “compensation”.



A future government will hardly be able to tell the electorate that it will receive no compensation for the impacts of a carbon price because that compensation was provided back in 2012!

Thus by keeping the compensation the Abbott government has not only increased the size of the deficit now, it has loaded the budget with a time bomb that will go off should a future government ever put a price on carbon.



How’s that for intergenerational fairness?



There are reasons to worry about debt, as the RBA’s governor, Glenn Stevens, noted last Friday before the economics committee, if the economy suffers a downturn and our deficit position is already weak, financial markets may not be as willing to take our money as they were during the GFC – and thus the cost of borrowing may soar.



But talking about intergenerational theft or suggesting debt is unfair on future generations requires a pretty simplistic view of the economy that involves worrying more about deficit and surplus than growth and employment.

