Public Debt, Intergenerational Fairness and Economic Growth

Fiscal policy is currently at the centre of a controversial economic policy debate with several dimensions. One of the longer-term questions concerns the intergenerational fairness of the planned increase in public debt. It reflects a widely held view that government borrowing leaves the younger generation with a net debt burden. According to this argument, public debt should generally be avoided and accepted only in exceptional circumstances. Germany’s debt brake, adopted in 2009, reflected this view.

A more immediate question is whether, and to what extent, rising debt-financed public spending, now made possible through special funds and the relaxation of the debt brake, can help Germany overcome its economic stagnation. Here, too, the prevailing public narrative is fairly clear. The modest recovery in economic activity observed in the fourth quarter of 2025 – gross domestic product grew by 0.6 per cent compared with the same quarter of the previous year – is often viewed critically. It is described as ‘growth through debt’ because the government spending programmes on infrastructure and defence that are driving much of this growth are financed through borrowing. The implication is that such growth cannot be sound, let alone sustainable. This is why fiscal policy is often said to be creating little more than a temporary boost.

Public debt does not automatically mean net debt

Over the past weeks and months, I have contributed to this debate on several occasions. In an article for Wirtschaftsdienst, ‘Die große Verwirrung: Schulden, Vermögen und Generationengerechtigkeit’, I show that the idea that government borrowing leaves the younger generation with net debt is at odds with a basic accounting principle. Every liability must have a corresponding financial asset. If the younger generation inherits the government’s liabilities, it must also inherit the financial claims on the government.

Public debt taken on today does, however, leave the younger generation with a future distributional conflict, as tomorrow’s taxpayers will have to pay interest to tomorrow’s holders of government bonds. But the net debt inherited by the younger generation is zero.

What Germany’s balance sheet tells us

This is also reflected in the balance sheet of the German economy, which I discuss in a guest article for the Frankfurter Rundschau co-authored with Carl-Ludwig von Holtfrerich, ‘Warum der Vorwurf der Generationenungerechtigkeit in die Irre führt’. Public debt does not appear as a net liability in the balance-sheet data for the economy as a whole, compiled annually by the Deutsche Bundesbank and the Federal Statistical Office. The reason is simple: financial claims and liabilities cancel each other out. If there is no net liability, there is nothing of this kind to pass on to the next generation.

Even looking at the government’s own balance sheet puts the prospect of an imminent ‘financial collapse’ into perspective. It is true that the government has liabilities of €2.7 trillion on its balance sheet. At the same time, however, it holds financial and non-financial assets worth approximately €4.6 trillion. This leaves it with positive net assets of around €1.9 trillion. It is therefore misleading to describe the German state as overindebted.

Fiscal policy as part of a new growth strategy

This matters because additional debt-financed public spending can be a central element of a new growth strategy for Germany, as I argue in Börsen-Zeitung, ‘Die Fiskalpolitik wirkt’.

Germany’s growth model of the 2000s was built around a rules-based, globalised world with seemingly almost unlimited external demand, particularly from the United States and China. At the latest, the war in Ukraine and President Trump’s second term have brought that model to an end. Germany therefore needs to change this model, or at least complement it, by strengthening domestic demand. During a period of stagnation, however, only expansionary fiscal policy can provide this stimulus.

What intergenerational fairness also means

Undermining expansionary fiscal policy with the false claim that it is unfair to younger generations because it leaves them with net debt ultimately harms everyone. But it is the younger generation in particular that stands to lose. Prolonged stagnation would deprive young people of income and employment opportunities.

Income and employment today matter far more than the interest that members of the younger generation will pay as future taxpayers to future holders of government bonds – a group to which they themselves will also belong. I can say this from my own perspective as someone who was part of the younger generation from the late 1970s to the early 1990s, when the governments of Helmut Schmidt and Helmut Kohl substantially increased public debt.