Debt burden on future generations

The white-knuckle negotiations in the United States Congress over the so-called “fiscal cliff” revealed deep divisions between, and even within, political parties as to how to tackle the nation's deficit and debt.

While a compromise has been reached (with the optimists now calling it a "fiscal slope") it is a reprieve and the US government will continue to struggle to balance the need to repay its debts with the provision of sufficient economic incentives for individuals to spend and for business to invest and employ.

The key motivating factor for avoiding the fiscal cliff was that the automatic tax rises and spending cuts scheduled for 1 January would have plunged the US and most probably the rest of the world into recession.

Part of the long term problem is that the USA, like most developed and many developing economies, is facing decades of population ageing.

Older people tend to earn and spend less and pay far less tax.

Simultaneously an ageing population places a far greater burden on the taxpayer from demands for healthcare, aged care and other support services.

There were almost 40 million people aged over 65 in the US in 2009 which represents 13% of the total population.

That is forecast to increase to more than 72 million by 2030, almost 20% of the population.

While not the cause of the US economic troubles since the meltdown in its housing market, population ageing will make it progressively more difficult in coming years for the government to manage its budget and achieve higher rates of economic growth.

The demographic outlook is far more severe in Europe with more than 17% of the EU’s population in 2010 aged over 65 and forecast to rise to almost 30%.

This should make resolution of the three-year European sovereign debt crisis even more urgent.

However there are differing opinions amongst European leaders about the severity and appropriate response to the debt levels and overall economic crisis.

German Chancellor Angela Merkel warned in her New Year address to the nation that “the crisis is far from over” and that “the economic environment will not in fact be easier but rather more difficult next year.”

This warning of more difficult times ahead was contradicted by European Commission president Jose Manuel Barroso who said this week that, “I think we can say that the existential threat against the euro has essentially been overcome.”

There was scepticism about this statement amongst financial market analysts with some predicting that Europe had delayed its “day of reckoning” and that governments faced a grim and difficult task of rekindling economic growth strong enough to stem the rising tide of unemployment.

The latest jobless rate for Europe has hit a new high of 11.8% with Greece and Spain over 26%. Almost a quarter of young people in the EU are unemployed, with the youth unemployment figures in Greece and Spain at tragic levels of 57.6% and 56.5% respectively.

A telling lesson from these crises is the lack of foresight by governments taking on large amounts of debt without sufficient preparation for future challenges including the budget demands from population ageing.

Presciently, the Howard government paid off all government debt and invested tens of billions in the Future Fund to ensure that future generations were not burdened with the superannuation entitlements of current defence personnel, federal police and public servants.

The commissioning by Treasurer Peter Costello of the Intergenerational Report to analyse the budgetary impact of population ageing up to 40 years hence is evidence that the Coalition well understand the necessity for governments to live within their means.

In contrast, the Rudd/Gillard government has taken Australia down the path of massive spending, funded through the four largest deficits in our nation’s history.

Treasurer Wayne Swan invariably compares Australia’s financial situation to that of nations already in crisis and declares that we have nothing to worry about.

He is in denial over the impact of Australia's ageing population which will place greater demand on government funding for support services, which in turn will make it much more difficult for a future Coalition Government to repay yet another Labor debt legacy.

There is no escaping the fact that Labor's $260 billion gross debt must be repaid at some point.

The cruelty of Labor's cavalier attitude to repaying debt is the likelihood that the burden of its reckless spending will fall upon future generations

That is why the Coalition is committed to paying off Labor's debt so that the young people of today will not face tomorrow higher taxes, reduced services and lower standards of living.