The increase in public debt in response to Covid-19 will not result in an unacceptable debt burden on young people. Instead, anyone seriously concerned about inter-generational equity would support action to reduce climate change and to improve the availability of housing.
A common objection to the increase in public debt resulting from the Government economic response to Covid-19 is that it represents an unfair burden on young people who will be saddled with having to pay that debt back. The argument is that it is largely the elderly whose lives are being saved by the lockdowns, while it is the young who are losing their jobs and who will then be saddled with the increased public debt burden.
This article shows why this argument is wrong. In addition, if the proponents were seriously concerned about inter-generational equity, there are much more significant areas for reform – such as climate change and the availability of housing – that would help improve present and future inter-generational equity.
The false distinction between public health and the economy
Recently as many as 222 of Australia’s leading economists signed a public letter rejecting ‘the view that there is a trade-off between the public health and economic aspects of the crisis’.
As these economists put it: ‘We cannot have a functioning economy unless we first comprehensively address the public health crisis’. Furthermore, although ‘the measures have come at a cost to economic activity and jobs, [they] believe these are far outweighed by the lives saved and the avoided economic damage due to an unmitigated contagion’.
It is true that younger people are more likely to be hit by the economic costs of Covid-19, as they are more likely to lose their jobs, or hours of work, and their future prospects may also be more damaged in a severe and prolonged recession. But that is why it is important to take early and tough action to constrain the spread of the virus, and to support people as much as possible by fiscal action.
This is of course what Australia has been doing, and Australia’s wage support is very much targeted at low income earners. Consequently it is of most help to young low-skilled people whose job prospects are most at risk, both now and in the future.
How significant is the future debt burden?
In a previous article, “Covid-19 and Future Fiscal Policy”, I estimated that even with continuing budget deficits over the next three years, as seems likely, gross public debt by all Australian governments would only have increased from 41 per cent of GDP to about 50 per cent in 2023. That would be less than half the present OECD average, and will easily be financed.
As Olivier Blanchard (the former Chief Economist at the IMF) has argued, this increase in public debt creates no additional fiscal burden for future generations, if the interest rate that the government borrows at is less than the nominal rate of growth in GDP. In that case, even if all the interest payments are capitalised and added to the debt, the ratio of public debt to GDP will fall over time, and therefore so will the debt burden on future generations.
As Blanchard, and others at the IMF have shown, more often than not, government borrowing rates have been lower than the nominal rate of growth in GDP. Certainly right now, in many countries, including Australia, interest rates are close to zero, or even negative in some countries, and that will continue so long as they are under-shooting their inflation targets.
Thus in Australia, the Reserve Bank is presently keeping the three-year bond rate as low as 0.27 per cent, which is well below the expected long-run growth in nominal GDP. Even the ten-years government borrowing rate is presently only 0.88 per cent, and until this rate rises significantly there will not be any increase in the debt burden for future generations.
When the debt burden might start to increase would be if the economic growth picked up, and inflation and interest rates started to rise as a consequence. However, that faster rate of economic growth will of itself increase government revenues and help to reduce the budget deficit.
So long as an output gap continues, with actual GDP being below its potential, Australia should not take precipitate action to reduce the budget deficit further. Instead, the time to really start tightening fiscal policy is only when aggregate demand can be expected to start putting inflationary pressure on potential supply.
But in that event the next generation should be richer and better able to pay off the debt burden. Whereas premature action to run down the debt, will leave young people worse off and less able to service the debt.
In sum, the increase in public debt is not really much of a threat to intergenerational equity. However, there are two real threats to intergenerational equity – namely housing affordability right now, and climate change in the future – and these are briefly discussed below.
Median dwelling prices in Australia have increased from around four times median incomes in the early 1990s, to more than seven times today (and more than eight times in Sydney). Consequently, home ownership rates are falling. Young people are postponing marriage, but even for those aged 35-44, home ownership has fallen from about 75 per cent in 1991 to about 6o per cent today.
Most of the increase in house prices reflects increases in the price of land, which in turn reflects restrictions on the effective supply of residential land. For many young people buying their first home, the only home they can afford is on the city fringe. But the amenities and job opportunities in today’s outer suburbs are far less than in the outer suburbs of the 196os, which were then only 2o km from the centre of the biggest cities – Sydney and Melbourne – and had reasonable access to jobs and services.
Spatial inequality is therefore growing, and this spatial inequality is much worse for young people, who cannot afford to live in their preferred location unless they get financial help from their parents.
As outlined in a CSIRO report, Australian National Outlook, we know that the key to addressing this pressing intergenerational problem is to change the nature of Australia’s urban and regional development by:
· Planning for multicentre cities in our major capitals and the development of regional centres that have high-speed links to the metropolis and each other.
· Increasing the population density 3 to 20 km from the CBD (which hasn’t changed in the last 20 years), but also around the satellite cities. This should involve a greater diversity of housing and land use.
· These different city centres can then be economically linked by mass transit, unlike most of the present major transport infrastructure projects, and will ensure reasonably short journeys to work, and good access to essential urban services, recreation and entertainment.
So what is standing in the way of these important reforms that would do so much to reduce the present increasing spatial inequality which is most disadvantaging young people? The short answer is nimbyism, because the existing residents (who often bought in decades ago) oppose any change to the nature of their suburb.
Climate change is the most important challenge facing our planet. It is already affecting all of us, but unless it is checked, the progressive warming of the planet will clearly have a much greater impact on young people than today’s older citizens.
Thus, unless we can agree on effective action to limit the increase in global temperatures to an increase of only 1.50 C by 2050, we know that the well-being of today’s young people will be very much worse.
We also know what we need to do to achieve this limit in temperature rise. Ideally, it would involve pricing carbon, which would encourage the most efficient alternative sources of energy.
In addition, as Ross Garnaut has shown in his recent book, Super-Power, Australia has a comparative advantage in the production of alternative sources of energy. Garnaut therefore concludes that ‘we can be confident that we will be richer materially sooner rather than later, as well as very much richer in human and natural heritage, should we embrace a zero-emissions future’.
But a failure to act in Australia, accompanied by similar paralysis in other countries, will hugely damage the future of our grandchildren.
So again, why don’t we act and take effective action now to reduce and eventually eliminate carbon emissions? And again, the answer is that vested interests are not willing to make the adjustment to their present way of life and jobs. But this cannot be a good excuse, and especially not for conservatives who profess concern for intergenerational equity.
As that bastion of economic orthodoxy, The Economist, put it in its latest editorial: ‘rich world governments will make a big mistake if they succumb to premature and excessive worries about budgets’.
Instead of pontificating about budget deficits and debt, conservatives who are really concerned about intergenerational equity should be advocating for action to reduce the risks of climate change and to improve housing affordability.
Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.