Borrowing allows the treasury to spend before it has collected an equal amount in revenue. It does not send today's builders into tomorrow to obtain their concrete or their dinner. The resources used now must be available now; what moves through time is a set of financial claims and the decisions needed to honor them. The volume's final question therefore has two parts. How does the government settle the current bill, and how does its choice of financing distribute the consequences across people and years? The phrase deferred taxation captures one possible path through that problem. A complete account must also follow interest, growth, the uses of the borrowed funds, and the people who inherit the assets beside the obligations.
Begin with a deliberately simple treasury that issues debt in its own unit of account and has no monetary financing, asset sales, or valuation adjustments. It starts with debt of one hundred. During the year it spends thirty on programs, collects twenty-five in revenue, and pays four in interest. The primary deficit is five, excluding interest; the overall deficit is nine, including it; new borrowing leaves debt of one hundred nine. Confusing the two deficits hides the claim made by earlier borrowing. Equally, confusing the deficit with total borrowing hides refinancing: if twenty of the old debt matures, issuing twenty-nine can repay that principal and finance the nine-unit deficit. Gross issuance is twenty-nine, while the net addition to debt remains nine. The maturity calendar matters even when the annual budget has not changed.1
The same debt can become easier or harder to carry as the economy supporting it changes. Let debt initially equal annual output, and suppose interest is four percent while nominal output grows by five percent. With no primary surplus or deficit and no other adjustments, debt becomes one hundred four while output becomes one hundred five; the debt ratio falls to about ninety-nine percent. If output grows by only two percent, the ratio rises to about one hundred two percent instead. A primary surplus of two percent of current output would lower the latter ratio to roughly one hundred percent. These cases show why a balance sheet needs a denominator and a path. Favorable growth can help carry debt; it does not promise that borrowing rates, growth, or political choices will stay favorable.2
The inheritance includes what the expenditure makes possible. Borrow to build a useful reservoir and later residents may receive a debt claim alongside a more reliable water supply. Borrow to repair damage and the benefit may be the loss prevented. Borrow for an unsuccessful project and the obligation can outlive the hoped-for gain. The nominal deficit alone cannot distinguish these cases. Nor can it establish how much current private production is displaced. When workers and equipment are fully occupied, a public project must draw them from other uses or obtain resources from abroad. When suitable resources are idle, expenditure may bring additional production into use. Bottlenecks, the response of prices and interest rates, and the actual quality of the project determine the result. Calling borrowing investment does not supply the missing return.3
The bond is also someone's asset, and the identity of that someone matters. A government payment of interest to a domestic holder is a receipt within the same country, but the people financing it through taxes may be different from the people receiving it. A transfer within a population can redistribute substantially, and the taxes used to finance it may alter behavior. Payments to foreign holders carry a different claim on domestic resources over time. Future generations can inherit bonds as well as tax obligations, public infrastructure as well as debt, and a changed stock of private capital. The argument that every borrowed unit simply burdens an undifferentiated unborn person misses those positions. The opposite claim that an internal debt cannot burden anyone misses them too.4
A government can meet future obligations through combinations of revenue, spending changes, asset income, refinancing, and the growth of its fiscal base. The available paths depend on its institutions and on the currency and terms of the debt. Issuing domestic money may help settle nominal domestic claims, but it does not manufacture real resources or foreign currency, and its consequences can include changed prices and expectations. Default or restructuring changes the promised payment and imposes losses on holders; refinancing requires lenders willing to continue the claim. Debt issued at fixed rates responds differently from debt repriced quickly, while foreign-currency liabilities can become more costly when the domestic currency falls. These possibilities make a deficit a political and monetary question as well as an accounting one. They do not turn the obligation into something costless.5
The deficit completes the inquiry into incidence by carrying it across time. The law names today's remitter, markets transmit burdens through prices, and the budget can defer a financing decision without deferring the real use of resources. To judge the result, one must set the debt beside the assets and benefits created, the people holding the claims, the resources displaced or employed, and the choices that will service the obligation. Borrowing can spread the financing of a durable common benefit; it can also postpone an argument that grows harder while it waits. The next volume, The Rule, takes up the institutions through which such arguments become decisions. A commonwealth's accounts are an account of its promises, and governing those promises is part of governing itself.