And shall our children inherit the deficit?

The US Republicans are beginning to worry about the morality of a hopelessly unbalanced budget
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New York - on 6th Avenue and 43rd Street, above the Gourmet Deli and Salad Bar and beside the Hop Won Express Chinese restaurant there is a digital clock. But instead of telling the time, it records the US national debt. The last four digits are indecipherable because they are racing up so fast, but you can watch the $10,000 digit clicking steadily upwards, for that is the amount by which the debt is rising each second. The total number was some $4,817bn, which is hardly meaningful, but helpfully a smaller digital clock underneath translates the figure into the amount each family "owes". At the moment this comes to $62,308.

The size of the US national debt, or rather, the way it has been soaring in recent years, is the subject of hot political debate this week, as we hit the final days of Newt Gingrich's 100-day "Contract with America". This was the programme on which the Republicans swept to victory in the Congressional elections last year.

The last remaining legislative measure of this programme cuts taxes for so-called middle-class families - those with less than $200,000 annual income - and will cost an estimated $189bn of revenue over the next five years. It was this bill that the House of Representatives voted on yesterday.

An earlier element of the plan, to make balancing the budget a constitutional requirement, did not get passed. So it has been up to the more fiscally concerned Republicans to add a provision to the tax-cutting legislation which in theory prevents the tax cuts from coming into effect untilspending cuts are made. The aim is to bring the budget into balance by 2002. There is, however, great scepticism as to whether this particular device will be effective.

This might all seem tedious stuff,were it not for the accompanying moral concern being articulated by these fiscally conservative Republicans: that the deficit represents this generation passing on a burden to the next generation. This subject - what economists clumsily call intergenerational equity - is of enormous importance not just for the US, but for all mature developed nations. All of them are running fiscal deficits and in so doing are consuming wealth which must, somehow or other, be paid for by the next generation.

So how do democratic politicians balance the needs and desires of voters with the interests of those voters' children and childrens' children? Politicians are accustomed to the idea that they should balance the interests of various groups of society. They are not accustomed to seeing themselves also in a trustee relationship for people not yet born.

Ironically, the US has a more manageable fiscal problem than other Western democracies. Its national debt, though large in absolute terms, is still modest as a proportion of GDP compared with most European nations. And because its taxes take a smaller proportion of GDP, there is more potential than elsewhere to increase taxation. More important still, the US has a less adverse demographic profile than any other Group of Seven country, and a substantial system of funded pensions, so that a large proportion of the people of working age have saved for their retirement.

Britain is in a similarly favourable position on all four counts. Continental Europe, by contrast, is in a desperate mess.

The demographic point is particularly important, for an ageing population increases the burden both of pensions and health care. If countries had made a proper actuarial calculation of these future liabilities they would now, far from running fiscal deficits, be accumulating large surpluses. Yet achieving a balanced budget is politically extremely tough.

This is evident in the American experience this week. A Gallup poll at the weekend asked voters which should have higher priority: cutting the deficit or cutting taxes. There was almost a two-thirds majority in favour of cutting the deficit. More than four-fifths said it would be of major concern if the Republicans failed in their promise to reduce the deficit. Yet the Republican politicians seem even now to be giving priority to tax cuts.

There are two broad responses one can make to this discrepancy. One is to say: we must elect new politicians, or at least teach the old ones to behave in a different way. This American experience in recent weeks is discouraging. Even if US politicians could successfully meet the demands of current voters, it is not realistic to ask them to perform the completely different role of acting as trustees.

The alternative response is to say: decisions which affect intergenerational equity must be removed from the political process. Just as it is not proper for politicians to interfere with the courts, so they should not interfere with the bodies which act as trustees for the interests of children and the unborn.

What in practice might this mean? It may mean having to take the funding of things like pensions, social security and health care out of the public sector. If each generation is to save for its own future needs, rather than rely on future generations to provide for it, benefits have to be funded in an actuarially consistent way. And however notionally "segregated" from current spending, public social security funds are an unsatisfactory solution. Only this week there were calculations showing that the US Medicare programme would be technically insolvent in the early years of the next century. There are similar concerns in France and Italy. It might be possible to segregate social security funds if those funds were not part of a government's regular finances, but were controlled by trustees whose explicit duty it was to match revenues and payments over a long period, taking into account demographic shifts. But that would mean an elected government losing control of a large proportion of state revenues. Imagine Kenneth Clarke having no control over National Insurance contributions, or Virginia Bottomley not being able to influence the revenues of the NHS, or its spending.

A different approach would be for governments to set regulatory standards and private sector institutions to provide services in line with those standards. Privatisation would not be on grounds of efficiency, but rather of morality: that would be the best way of ensuring fairness between generations.

For many people in Europe, whose ideas have been shaped by the post-war consensus on the welfare state, this will seem shocking. But the consequences of the present arrangements, which are piling up an enormous burden on our children and children's children, ought to be more shocking.

Europeans are inclined to sneer at the American political process, which, like American social security, is deeply flawed. But the fascinating thing, watching this US debate, is to see ordinary politicians talking about the need to cut the deficit in order to be fair to future generations. There is a maturity and morality to the debate which sounds impressive to European ears.