Is the Fiscal Deficit Misconceived? Proponents of Generational Accounting Overstate Their Case

The fiscal deficit is "ill defined"; it is "without theoretical background"; it is "a number in search of a concept". Such judgements are characteristic of a prominent part of the literature on the new measurement concept of generational accounting. This paper argues that such criticism is excessive. Starting out by sketching the theoretical background from which these judgements are derived, the paper reviews various aspects of the issue, paying particular attention to the results of empirical studies. In a first stage it shows that, in the light of the evidence, not only the present values of lifetime income flows, but also period incomes, or more generally, time profiles of income flows "matter". In a second stage, the paper looks at the empirical relevance of deficits in particular. The evidence is less conclusive here, but studies which allow for cyclical changes, inflation and time lags between variables do show results which go in the direction one would expect on the basis of a period-oriented approach. A concluding section of the paper challenges the claim that the deficit is (entirely) a result of arbitrary fiscal language