Musgrave Thesis:

Transfer Through Reduced Capital Formation

If resources are fully employed, an increase in public services shifts resources from the private to the public sector, leaving less for the production of private goods. In this sense of resource release, the burden must be borne by the present generation.

A first mechanism of burden transfer is provide through reduced capital formation. To see how it works, we once more return to  the framework of a 'classical' system where investment adjusts itself automatically to the level of saving forthcoming at a full level of income. Given such a system, any transfer of resources from private to public use leaves the private sector with fewer  resources. In this narrow sense, the burden of today's public expenditures must be borne by today's generation. But the resource withdrawal from the private sector may be from consumption or from capital formation. In the first case, the welfare of the present generation, as measured by its consumption is reduced and the income of the future generation is unaffected. In the second case, the consumption welfare of the present generation is untouched while the future generation will inherit a smaller capital stock and thus enjoy a lower income. In this sense, the future generation is burdened. If we assume further that tax finance comes out of consumption while loan finance come out of saving (hence, under the assumption of a classical system, out of investment)it then  follows that loan finance burdens future generations.

Preceding on the principal that public services should be financed on a benefit basis, the nature of expenditure to be financed  becomes of crucial importance. In the case of public expenditures, the benefits will extend into the future, so that burden transfer
is called for as a matter of intergeneration equity.