Myth
The government has to balance its budget.
Replies
Reply 1
A government has to deliver full employment at a living wage in a sustainable economy where all other essential services are also provided. If balancing the books means you give up one or more of those, which would it be, and why?
Reply 2
Running a deficit is about saying a government is building a better tomorrow. A deficit is a vote of confidence by the government in its vision of a better future for a country.
Reply 3
A government without a deficit is a government that's run out of ideas. Get rid of it.
Reply 4
If you want the government to invest without borrowing, how are you going to do that? And why?
Reply 5
A government doesn't have to run a deficit to invest in our future, but no one's found a better way to do it.
Reply 6
Sure we can balance the government's books. People can also be unemployed, starve, go without education and perish as a result of climate choice. Tell me which one you want.
Reply 7
Running a deficit is the surest way known to humankind to deliver full employment. If you want unemployment, please tell me why?
The explanation
The government has only got four economic tasks.
It has to make sure anyone who wants a job can have one.
It has to make sure they can live on the wage that they earn, and help if they cannot.
It has to make sure that the jobs people people have don't harm our long term survival.
It has to make sure it can deliver all the support that's required to deliver these objectives, from education and healthcare, to security, justice and defence, onwards.
And that's it. There's nothing that says it has to balance its books when achieving those goals.
Anyone who says otherwise has to explain which of these objectives they'll give up to balance the books.
And they'll have to explain why they want to do that.
And why that's a good thing to do.
Because there is no virtue in the government balancing its books. There are three reasons for that.
First, a balanced budget is only the right sized budget if it delivers on the four economic tasks that the government has. If it does not it's the wrong budget, even if it is balanced.
Second, government spending is the only real and sustainable way that we have to inject new money into the economy. And if there isn't full employment; or if people can't afford to live on their wages; and if we need to invest to go green; or if we need to supply other essential services; then in each of those cases, spending more, meaning that the government runs what's called a budget deficit, means that the government has created the new money that's needed that to deliver on its goals. Choosing a balanced budget as an alternative to delivering on its promises would suggest we'd got a pretty poor government in that case.
And third, balancing the books is all about now. It's a technical exercise in book-keeping that's about making sure everything is neat and tidy at this moment and hang the consequences for tomorrow. But tomorrow matters. And investing in the future is what we need to do. And all that running a government deficit means is that there is investment taking place to create value for today, tomorrow and time to come. A government that will invest has to borrow. If you want a government that has a vision, a plan, and a hope for better things for everyone you want to know it's willing to put money behind it. Running a deficit is about saying a government is building a better tomorrow. Isn't that what we want?
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“the jobs people have don’t harm our long term survival.” “the need to invest to go green”
I like your approach — keeping it succinct — but wonder whether it would be appropriate to include reference to this country’s responsibility to those who live elsewhere.
In a Twitter thread on 29 May, Jason Hickel @jasonhickel https://twitter.com/jasonhickel/status/1266338503664812032 wrote: there is no decolonization without degrowth. This is true in a very concrete sense. As follows:
1. Right now, high-income nations maintain high levels of income/consumption through an ongoing process of net appropriation (of land, labour, resources and energy) from the South, on unequal terms.
2. Decolonization here means that high-income nations would either have to cease net appropriation (i.e., stop taking more materials/labour than they give in return), or cease unequal exchange (i.e., pay fair prices for the materials/labour they extract).
3. Taking the first route would however likely result in a reduction in high-income countries’ total consumption of materials, while taking the second route would likely result in a reduction in their income.
4. Of course, they could compensate for their loss of cheap labour/resources from the South by plundering themselves (and cutting wages), but this could be understood as a form of internal colonization (like enclosure in the 1500s), so it violates the principle of decolonization.
I think brief is important
I also accept the obligation is universal
Agreed. The demand to balance the budget is a demand to resist wealth redistribution and ‘keep (other) people in their place’.
Coming from another angle……
When the Single Currency was being constructed fiscal conservatives (mainly Germans) were concerned that member states would run excessive budget deficits. And what did the conservatives demand? That in normal times the budget deficit should not exceed 3% of GDP. The idea being that 3% would be sustainable over the long term and not lead to ever rising debt. It was an arbitrary number but justified by assuming 60% Debt/GDP, 5% rates, 2% inflation and 1% real growth….. and remember, this was for normal times. So, in the early 90s fiscal conservatives were completely content with a deficit of 3% every year.
My question is “When did fiscal extreme-ism (ie balanced budgets) become mainstream?”…. it never used to be that way.
As usual, a good question
I would say balanced budgets have been pretty much the desired norm since governments began borrowing, i.e issuing bonds.Hence the use of negative word associations with terms like gov debts,gov defecits,shortfall borrowing requirements….all indicate that hitsoriaclly such events were not at all desirable.
In the 90’s economically, the world was pretty much a benign one,which also happened to be the period the Euro was created.Those figure you quoted were seen as sensible/reasonable target in that global environment. Which also allowed many of the early members to fiddle their figure sufficiently to gain access to the prestigious club,of course once you were, “standards “slipped, but noone was going to be asked to leave.
The rest of the developed world tended to think it had also solved the problems of boom bust and inflation and hence the the need for defecits……like this was now all outdated. Of course that was never the case and a financial crash quickly smashed that delusion.
I would add that no government intends to have a deficit ,they just happen sometimes for various reasons. The issue is that we should not all panic if that happens,unless there is something else fundamnetally wrong going on in a nation.
All in all deficits should never be a deterrent for gov to help its citizens.
Agree with the last
So governments should actively want deficits
Quite right,yes they should,unless of course they have solved all the problems faced by the world.
I am worried that the concept of investment only comes in at Reply 4. In comes in too late, as if it has been snuck in.
Why? To me it looks inconsistent – the concept of investment should be asserted from the beginning.
Government deficit = investment, the ‘deficit’ is actually just a record of the money the Government as spent into (invested) the country to create jobs, infrastructure that helps people and private companies.
Should there be a question pertaining to ‘If the Government does not invest, then who do you suggest does?’ – so that a critique of ‘inward’ investment can be lay in waiting to slay the lies told there?
Noted!
Beofre I start I have a warning. This is a thicko’s question, please be patient.
When we talk about government borrowing, government debt and interest payable on that debt/borrowing who are we borrowing from and who do we pay the interest to? I understand that the majority of the interest is paid to savers and pension funds so in those instances is it correct to say that savers/pension funds buy government debt? Are we in effect asking the BOE to create money for us which we then ‘borrow’? If I understand it correctly the problem for Greece as an example was that it could not create money but had to go to the European Central Bank to borrow in a real sense in a way that we need not?
My failure to grasp this stuff might be, at least in part, be due to fixed/dogmatic associations with the terms ‘borrowing’ ‘debt’ and ‘interest’.
I’ll happilly try to understand this using existing entries/articles if anyone can point me to them.
Some of the facts are here
https://www.taxresearch.org.uk/Blog/2020/05/15/uk-government-debt-some-facts/
The main ‘lenders’ (correctly called savers) are banks, pension funds, life companies, (all three here and abroad, but mainly here) foreign governments, and some (not many) individuals and companies
Money is created to buy the Bank of England share
Technically MMT points out as all money is ultimately government created it also provides the rest too: that’s just money the government has spent not claimed back in tax
You are right: Greece, without its own currency and so with an ineffecti9ve central bank, could bot create money to do this
Nor can local governments or the Scottish government, for example
Think of the government as a bank
And the people who fund the borrowing as savers and it all makes a lot more sense
Thank you – getting there now.
Agree re investment.
And shouldn’t there be mentions of the alternatives to a government deficit?
IE that you can run a government without a deficit if you export a lot – but as Germany has found that makes you very vulnerable to the circumstances in your export receiving economies.
Or if the private sector (that’s effectively the people that elect the government) is prepared to pay out every year in order to avoid the government from running an annual deficit.
The people who are against government deficits are usually the same people who would be horrified if they thought that not having a government deficit actually meant they themselves might have to pay for that privilege!
It’s not possible to do everything in one myth
These are meant to stack…
But to provide some arguments on their own
And be of manageable length
This is superb Richard. Clear and concise. Also it acts as a launch pad to delve further if the reader wants to. It’s certainly helping me to begin to understand this topic in greater depth. Many thanks, Karl.
Thanks