Generational Accounting

These arguments imply that information about the net life cycle burden for each generation is more important and useful than the government budget balance in each period for the purposes of investigating the economic impact of fiscal policy. From this viewpoint, Kotlikoff (1992) introduced the notion of “generational accounting,” which estimates the present value of a fiscal burden and the benefits caused by government policies for each generation.

According to generational accounting, the two policies in Sect. 3.1 are the same since there is no intergenerational transfer. In Sect. 3.2, generation t receives more than it pays, while generation t + 1 pays more than it receives. With respect to this intergenerational redistribution, both policies are the same. Hence, in both instances, generational accounting provides a useful indicator of fiscal policy.

Is generational accounting always effective as an indicator of fiscal policy? If public intergenerational redistribution may be offset by altruistic bequest motives, public redistribution does not have clear policy implications. Then, generational accounting also loses its policy implications. This notion is inconsistent with the extended Ricardian, namely Barro’s, debt neutrality. That is, if Barro’s neutrality is maintained, not only is a government’s budget balance meaningless as an indicator of fiscal policy, generational accounting is also useless.

If Barro’s neutrality is not maintained, we can compare notions of a government deficit and generational accounting. Generational accounting is defined in terms of stock variables, while a fiscal deficit is defined in terms of flow variables. If Ricardian debt neutrality is maintained within the same generation, generational accounting is more useful than fiscal deficit as an indicator of fiscal policy.

In order to have Ricardian neutrality, the agent behaves in a way that is subject to the present value budget constraint. The plausibility of this assumption depends upon the plausibility of a perfect capital market. In reality, because of liquidity constraint and an imperfect capital market, the agent cannot borrow easily; hence, the agent may behave in a way that is subject to the current budget constraint. In such a Keynesian situation, it is more plausible to assume that Ricardian debt neutrality is not maintained. If the Keynesian situation is more realistic, a flow indicator of fiscal deficit becomes an important fiscal indicator.

However, in the neoclassical situation, the original Ricardian neutrality is at least maintained by assumption. Liquidity constraint is not regarded as an important factor. If the agent behaves according to a long-term horizon and public intergenerational redistribution policy is important, then generational accounting gives us useful information about fiscal policy. Table 7.3 summarizes the above argument.

Table 7.3 Useful indicators of fiscal policy

Keynesian situation

Fiscal deficit

Original Ricardian

Generational accounting

Extended Ricardian (Barro’s neutrality)

Distortionary taxation

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