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.