INTERGENERATIONAL FISCAL BALANCE IN AUSTRALIA: SHOULD WE USE FISCAL SUSTAINABILITY OR INTERGENERATIONAL EQUITY?

Abstract

The burgeoning of the Australian welfare state in the post‐World War Two era, combined with the projected rise in the dependent‐to‐working population ratio from around 2011, is projected to raise social expenditure substantially, potentially exposing Australia to enormous fiscal pressure. Contemporary measures of budget balance do not take into account the fiscal impact of such long‐term cost determinants. Moreover, there is no agreed conceptual framework for the design of public policies to address this problem. This paper presents two competing models for measuring intergenerational fiscal balance: fiscal sustainability and intergenerational equity. These models are then used to illustrate the implications for the design of public policies to address the fiscal implications of demographic change; in particular, investment in education is used to highlight the application of these models since it is a quintessential example of generational transfer and a potentially effective measure for reducing the real value of debt passed from the current generation to future generations.