Fiscal Policy, Fairness between Generations and National Saving

| Publication date: 1 Mar 2010 | Theme: Macroeconomics | NIESR Author(s): Barrell, R; Weale, M | JEL Classification: E21 E61 E62 H62 H63 | Journal: Oxford Review of Economic Policy Vol 29

We assess fiscal policy from the perspective of fairness between generations and the relationship between this and national saving, in the context where the United Kingdom is one of the lowest saving of all the OECD economies. Cross-section and pooled data suggest that governments are in a position to influence national saving and we set out a simple overlapping generation model to show the effects of national debt, of pay-as-you-benefit systems, and of legacies and movements to land prices as means of effecting transfers between generations. Having shown that governments can influence the distribution of resources between generations we then discuss three notions of fairness between generations: (i) that each cohort should pay its own way; (ii) that a social planner should reallocate resources between generations to achieve an inter-temporal optimum; and (iii) that resources should be reallocated so that generations alive at the same time have similar living standards. In the light of these observations we discuss appropriate responses to a variety of economic shocks and we conclude with implications for policy in the aftermath of the recession.

Keyword tags: 
fiscal policy
national saving
generational equality
overlapping generations analysis
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