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Squeezing the Future

BOSTON: Few people desire to saddle their children with mountains of debt as an inheritance. After decades of pushing the costs of today’s expenditures and promises onto future generations, that bit of family wisdom appears - at long last - to be influencing government policy.

Most West European countries lowered budget deficits to 3% of GDP to meet the terms for joining the European Monetary Union. America has recorded a balanced budget after five years of sharp trimming. In the transition countries, belt-tightening is a key part of free market reforms. So, are future generations now safe from fiscal profligacy now that hard fiscal discipline seems in place? Unfortunately, future generations remain under threat.

The problem is that balanced budgets and stable debt-to-national income ratios are poor indicators of generational equity. Why? Government promises made today but doled out tomorrow, such as social security payments, do not show up in annual budgets. Nor do standard accounting methods tell us which generation must ultimately pay for government consumption spending. An innovation called "generational accounting" sheds new light on the issue of generational equity.

"Generational accounting" assumes that all generations, including those not yet born, will receive the same per-capita level of transfers and government purchases. These two items, plus a country’s net debt, comprise what must be paid for in taxes. The question, then, is to divide the bill among current and future generations.