Question

Evaluate circumstances under which the public debt could be a burden to future generations.

Answer 1

Public debt is always a liability for future generations. The 'burden' of the loan applies to the issues that occur when the debt is repaid. The new generation avoids the pressure as the government borrows. Once the loans are repaid at a later date with interest, future generations will have to suffer.

It is widely argued that borrowing results in a much more direct shift of burden from present to future generations than its effect on investment and capital development. As people also see borrowing, it helps society to escape some burden now-since no taxes are collected-while future generations have to pay taxes to cover interest and principal on bonds. Future generations inherit both the ties and the obligations they serve. Once interest and principal payments are made, the funds are actually transferred from one individual to another in the same family, a move that can have some negative effects on the economy.

One main effect of growing debt is that it slows down economic development , which in turn slows down wage and profit growth.

This slower growth is largely due to the phenomenon known as "crowd out" whereby investors buy government debt at the cost of profitable investment in private capital. Less innovation inevitably means fewer facilities, computers, machinery and software, and therefore fewer new projects or innovations. As a result, productivity growth for jobs will suffer, and income and wage growth will eventually slow down.