Who pays for the record debt?

The method sounds tempting, especially in times of crisis: finance current expenses with taxes or long-term debts. But that’s more complicated than even many economists imagine.

Taxpayers' Association debt clock for the state of Lower Saxony alone

Dhe state has raised huge sums of money to finance the Corona crisis. The budget deficit for this year is likely to be almost 7 percent of the gross domestic product for the federal government. There are also the deficits of the federal states, and next year the federal government alone is planning further deficits amounting to 180 billion euros, around 5 percent of the gross domestic product. With such sums of money one can quickly get queasy, and some people wonder whether we are not placing a heavy burden on future generations, which “our children’s children” may still have to nibble on.

In fact, the argument of the burden on future generations was so capable of political consensus a decade ago that the Bundestag, with a two-thirds majority, added a “debt brake” to the Basic Law. However, in recent years there has been an increasing number of voices, not only politically but also scientifically, who say that this focus on intergenerational justice is unfounded and only a sham argument that hinders necessary investments. Two arguments in particular are put forward: First, a theoretical one, which fundamentally denies the intergenerational redistribution effect of debt. Second, a practical one that draws on the state’s currently extremely favorable financing conditions.

As an example of the first point of view, the economists Holger Sandte and Adalbert Winkler recently wrote in their article “The myth of the burden on the young generation” in “Die Zeit” that national debts were not redistributed between generations, but only within one and the same generation. because “the debts of the state are the assets of households and companies. Both are inherited, not just the debts. “

Difficult mechanism

This argument is based on two simple balance mechanics insights. First, in purely accounting terms, government debts must be matched by private assets in the same amount. If one understands by a generation the amount of all households living at a given point in time, then the generation defined in this way is trivially both the owner of all national debts and the addressee of all tax claims. Your net worth does not change with the amount of national debt. Second, the goods and services demanded by the state must be produced and earned by the households living today and are not available to them for investment or consumption, regardless of the type of financing. In this sense, it seems irrelevant whether households renounce because the state forces them to do so through taxes, or if they renounce voluntarily because they buy national debt.

This type of reasoning makes two critical simplifications. First, it uses a crude generational term that lumps centenarians and newborns into a generational pot, and second, it forgets that buying government debt, as opposed to paying taxes, is voluntary. This means that households have to be better off buying government debt than if they hadn’t taken part in financing government spending.