Understanding the economic fallacies of the intergenerational debate

Abstract

This paper demonstrates that Federal spending is not inherently financially constrained and does not have to be facilitated via prior taxation or debt‐issuance. It also refutes the claim that budget deficits result in higher interest rates in the future, with lower levels of capital formation and economic growth as a consequence. These misconceptions together lead to the nonsensical claim that by running surpluses now the Government will be better able (because it has ‘more funds stored away‘) to cope with future spending demands. The paper thus challenges the conventional view, such as that espoused in the 2002 Australian Treasury Intergenerational Report, that the ageing population will place unsustainable demands on the Federal budget.