Inter-generational equity demands that no current expenditure be Essay

Inter-generational equity demands that no current expenditure be financed by loan and that all capital expenditure be financed by loan. Explain and assess thi - Essay Example In other words those generations that take benefit from public spending should also bear the cost of such benefit. The rule of fairness matches the cost and benefits of public spending between generations. In 1997 a golden rule of public finance, that over the cycle, government borrowings should not exceed net government capital formation and hence current spending should be financed by current receipts, was adopted by the government. Application of this golden rule draws a distinction between Capital and current spending. It is clearly understood that the benefit of ‘Capital’ spending may spread over the generations, whereas ‘Current’ spending is for current consumption to be benefited only by current generation. Therefore the current consumption or expenditure must be controlled tightly so that its financial burden does not spread to next generation. This principle works only in approximation as certain overflows are not ruled out. Not all but some benefits of expenditure on infrastructural, institutional and cultural capital investments will pass on to next generation. The ‘benefiter-pays’ rationale of inter-generational equity requires that each generation should pay for the resources it uses. The principal of fairness coupled with ‘benefiter pays’ rule suggests that the entire capital expenditure should not be financed through borrowings, as some benefits of capital expenditure are also being derived by current generation. Accordingly some burden of capital expenditure should be shared by current generation in order to meet the objectives of ‘inter-generational equity’. While defining ‘Inter-generational equity’, Earth & Peace Educational Associates International (EPE) has observed that, ‘each generation has the right to inherit the same diversity in natural and cultural resources as enjoyed by previous