Generational Accounting

DEFINITION of 'Generational Accounting'

An accounting method that considers how current fiscal policies affect future generations. Generational accounting analyzes whether government spending and tax programs that benefit current members of society will produce an unfair tax obligation for future generations. The purpose of this accounting style is to achieve generational balance, where current and future generations have equivalent lifetime net tax rates, which allows for fiscal sustainability.

BREAKING DOWN 'Generational Accounting'

The government's tax programs and fiscal policy can be adjusted to provide more care and benefits for certain members of a country's population. However, focusing programs on a specific group forces other generations to pay the costs, essentially imposing a taxation without representation. For example, spending on retirement programs for the elderly requires that younger generations foot the bill.

This concept can be extended to future generations. Let's say the government were to lavishly spend on programs to benefit its current population in the short term. The debt obligations could be so large, that they could not be repaid by the current population in an average lifetime. In this case, the debt would be passed on to the next generation of citizens, who must then pay for benefits they never received. Generational accounting aims to eliminate policies that negatively impact future generations.

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