Progressive Money

Economics in the Real World · scenario 3 of 10 · about 12 min

“Public debt will burden future generations.”

Why people make this argument

It sounds like simple fairness: if we spend now and borrow, someone later must pay. News stories divide the national debt by the population and report what 'each Australian owes'.

The strongest version is more careful. Interest on the debt must be paid every year, and if interest rates rise it takes money that could have gone to schools or hospitals. Debt run up to fund today's consumption, rather than investment, may leave later taxpayers paying for benefits they never received. And high debt may make a future government more reluctant to respond to the next crisis. These are serious points about choices across time, not just slogans.

Ideas you'll need

  • Debt as a stock, deficits as a flow
  • Interest rates relative to growth
  • Who holds the bonds
  • Real investment versus financial burden

What isn't in dispute

Gross Commonwealth debt is forecast at $1,051 billion, 34.0 per cent of GDP, at 30 June 2027, with net interest payments of $19.9 billion, about 0.6 per cent of GDP, in 2026–27. The PBO projects interest costs rising later in the decade, and debt falling as a share of GDP in 23 of its 27 long-term scenarios.

The debt is in Australian dollars. In May 2026 the AOFM reported that non-residents hold just over half of Australian Government Bonds, and the RBA around 20 per cent of Treasury Bonds. Every bond is also a financial asset for whoever holds it.

How mainstream economists would analyse it

Mainstream economists generally reject the headline that each Australian 'owes' a share of the debt, but many think debt can still shift costs across generations. Future taxpayers pay the interest, and when bonds are held overseas some of that interest leaves the country. If government borrowing pushes up interest rates and crowds out private investment, the economy future generations inherit may be smaller.

Against that, Olivier Blanchard argued in 2019 that when interest rates stay below the economy's growth rate, debt can be rolled over without later tax rises, so its cost may be smaller than assumed; he stressed this can change. Philip Lowe described Australia's pandemic borrowing in 2020 as 'entirely manageable and affordable', while rejecting the idea that central bank financing would make it costless: 'there is no free lunch'.

How MMT economists would analyse it

MMT economists argue that what a generation inherits is set by real things, not financial balances. The roads, hospitals, skills and climate it inherits come from what is produced and preserved, and debt in a currency the government issues does not take those away.

Future generations inherit the bonds as well as the debt: a Commonwealth bond is a liability of the government and an asset of a super fund, bank or household. Interest on it is income to bondholders, which MMT economists say raises questions about who benefits, and they argue that the rate the government pays is ultimately shaped by policy. The real intergenerational risk, on this view, is underinvesting today: unemployment that wastes skills, and failing to build what the future will need.

Your turn

Your turn: A headline says every child born today is 'handed a share of the national debt'. Assess the claim: what is misleading, what real concern sits behind it, and what evidence would settle the argument?

Show a model response and the rubric

The headline misleads in two ways. No child receives a personal bill, and the same bonds are assets: super funds, banks and other investors hold them, and the interest is someone's income. The debt is in Australian dollars, so the Commonwealth cannot be forced to default on it.

But there is a real concern behind it. Interest, about 0.6 per cent of GDP net in 2026–27 and projected to rise, must be paid each year, and just over half the bonds are held overseas, so part of that interest goes abroad. A mainstream economist would add that if borrowing pushes up interest rates or funds consumption rather than investment, future Australians may be worse off. An MMT economist would say the bigger burden is wasted labour and missing investment, and that interest rates are largely a policy choice.

What would settle it: whether interest rates stay below growth, whether the borrowing funded productive investment, and whether higher debt has pushed up Australian interest rates or inflation. My view assumes the debt stays in Australian dollars and rates stay manageable.

A strong response

  • Distinguishes debt (a stock) from deficits and interest (flows), and expresses debt relative to GDP
  • Recognises that government bonds are also financial assets, including for overseas investors
  • Explains the concern about interest costs and crowding out fairly, attributed to mainstream economists
  • Explains the MMT view that real resources and investment determine what a generation inherits
  • Names evidence that would decide the question, such as interest rates relative to growth

There is no single right answer. Reach your own conclusion, and be ready to say what evidence would change it.

Limitations and counterarguments

The MMT view leans on the idea that interest rates are a policy choice. The RBA sets the cash rate, but longer-term bond yields are set in markets, and the RBA's goal is low inflation and full employment, not cheap government borrowing, so the government does not fully control what it pays. Interest paid to overseas holders is a real transfer abroad. And high interest bills can make future governments reluctant to spend, whatever the theory says.

The mainstream view has limits too. Crowding out is hard to find when the economy has spare capacity, per-person debt headlines ignore the assets on the other side, and cutting public investment to reduce debt can leave future generations worse off. Blanchard's caveat cuts both ways: the gap between interest rates and growth can change.

Revisit Fiscal Policy · Bill Mitchell: Demystifying Modern Monetary Theory · Stephanie Kelton: The big myth of government deficits | TED · Modern Monetary Theory - A Primer

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