By Dr Frank Shostak
By popular thinking the budget deficit reduces national savings, whilst a budget surplus is seen as contributing to savings. National savings are defined as the sum of private savings (the after-tax income that households save) and public savings.
By generating budget surpluses, so it would appear, the government generates wealth, thereby strengthening the economy’s fundamentals. This argument would be correct if government activities were of a wealth-generating nature.
This is, however, not the case. Government activities are confined to the channeling of wealth from wealth generators to wealth consumers. This results in taking wealth from one person and shifting it to another. Various so-called impressive projects that the government undertakes also fall into the category of wealth redistribution.
The fact that the private sector didn’t undertake these projects indicates that these projects are low on the priority list of individuals.
Given the state of the subsistence fund the implementation of these projects is going to undermine the well-being of individuals since these projects are going to be introduced at the expense of projects that are higher on the priority list of individuals.
Let us say that the government decides to build a pyramid that most people regard as low priority. The individuals that are going to be employed on this project must be given access to various consumer goods to sustain their life and well-beings.
Since the government is not a wealth producer it would have to impose taxes on wealth generators (those individuals who produce goods in accordance with individuals’ most important priorities) in order to support the building of a pyramid.
Note that whenever wealth producers exchange their products with each other, the exchange is voluntary. Every producer exchanges goods in his possession for goods that he believes is going to raise his living standard. The crux therefore is that the exchange or the trade must be free and thus reflective of individual’s priorities.
Government taxes are, however, of a coercive nature: they force producers to part with their wealth in exchange for an unwanted pyramid. This implies that producers are forced to exchange more for less, and obviously this impairs their well-being.
The more pyramid-building undertaken by the government, the more wealth is taken away from wealth producers.
We can thus infer that the level of tax, i.e. wealth, taken from the private sector is directly determined by the size of government outlays. Moreover, if government outlays could have generated wealth, then these outlays would have been self-funded and would not have required any support from wealth generators.
Introduction of money
The essence of what was said is not altered by the introduction of money. In the money economy the government is going to tax (take money from wealth generators) and pay the received money to individuals that are employed directly or indirectly by the government.
This money is going to give these individuals access to consumer goods. Government-employed individuals are now able to exchange the taxed money for various goods that are required to maintain their lives and wellbeing.
What then is the meaning of a budget surplus in a money economy? It basically means that the inflow of money to the government exceeds its expenditure of money. The budget surplus here is just a monetary surplus. The emergence of a surplus produces the same effect as any tight monetary policy.
On this Ludwig von Mises wrote,
Now, restriction of government expenditure may be certainly a good thing. But it does not provide the funds a government needs for a later expansion of its expenditure. An individual may conduct his affairs in this way. He may accumulate savings when his income is high and spend them later when his income drops. But it is different with a nation or all nations together. The treasury may hoard a part of the lavish revenue from taxes, which flows into the public exchequer as a result of the boom. As far and as long as it withholds these funds from circulation, its policy is really deflationary and contra-cyclical and may to this extent weaken the boom created by credit expansion. But when these funds are spent again, they alter the money relation and create a cash-induced tendency toward a drop in the monetary unit’s purchasing power. By no means can these funds provide the capital goods required for the execution of the shelved public works.
Contrary to the popular way of thinking a budget surplus – i.e. a monetary surplus – does not automatically make room for lower taxes. Only if government outlays are curtailed, i.e. only when the government reduces the number of pyramids it plans to build, is tax effectively lowered. Lower government outlays imply that wealth generators are going to have a larger portion of the subsistence fund at their disposal.
If, however, government outlays continue to increase, notwithstanding budget surpluses, no effective tax reduction is possible; on the contrary, the share of the pool of the subsistence fund at the disposal of wealth generators is going to diminish.
For example, if government outlays are $3 trillion and the government revenue is $2 trillion then the government will have a budget deficit of $1 trillion. Since government outlays have to be funded this means that the government would have to secure some other sources of funding such as borrowing, printing money or a new form of taxes. The government is going to employ all sorts of means to obtain resources from wealth generators to support its activities.
What matters here is that government outlays are $3 trillion and not that the deficit is $1 trillion. For instance, if government revenue on account of higher taxes were $3 trillion then we would have a balanced budget.
But would this alter the fact that the government still takes $3 trillion of resources from wealth generators? Again, the effective tax is $3 trillion on account of government outlays.
Some commentators are of the view that the private sector cannot be trusted to build up and enhance the nation’s infrastructure. For example, the US urgently requires the building and upgrading of bridges and roads.
There is no doubt that this is the case. However, can Americans afford the improvement of the infrastructure?
The arbiter here should be the free market where individuals, by buying or abstaining from buying, decide on the type of infrastructure that is going to emerge. If the size of the subsistence fund is not adequate to afford better infrastructure, then time is required to accumulate savings to be able to secure a better infrastructure.
The build-up of the pool of the subsistence fund cannot be made faster by raising government outlays. An increase in government outlays is going to weaken and not strengthen the pool of the subsistence fund. Also note that whilst the government can force various non-market chosen projects, the government cannot make these projects economically viable.
What about the lowering of taxes on businesses – surely this will give a boost to capital investment and strengthen the process of wealth formation?
As long as the lowering of taxes is not matched by a reduction in government spending this will encourage a misallocation of savings. (This will divert savings from wealth generating projects towards activities that emerged on the back of the tax reduction, all other things being equal).
Various capital projects that emerge on the back of such government policy are likely to be the equivalent of useless pyramids.
Now, one of the ways of securing the necessary funds by the government is by means of borrowing. But how can this be?
A borrower must be a wealth generator in order to be able to repay the principal loan plus interest. This is, however, not the case as far as the government is concerned, for government is not a wealth generator – it only consumes wealth.
So how then can the government as a borrower, producing no wealth, ever repay its debt? The only way it can do this is by borrowing again from the same lender – the wealth-generating private sector.
It amounts to a process whereby the government borrows from you in order to repay you.
Conclusion
We can conclude that the only meaningful contribution the government can make to the process of wealth generation, and hence individuals living standards, is by focusing on a reduction in its outlays – not whether there is a budget surplus or a deficit. This in turn means the government must remove itself from business activities and permit wealth generators to get on with the business of wealth generation
ALL Government spending is on the ‘Loss’ side of the ledger not the ‘Profit’ – hence they hate Capitalism’s Profit and Loss and love Spending and Debt on any wasteful Make Work scheme further destroying the economy by distortion and money printing, keeping the vicious cycle going. The Golden Rule is don’t stop spending and printing.
Of course they love to profit from the losses as Government salaries and pensions are indexed linked, although they will be realising how falsely inflation figures are underestimated by government as they see their salaries unable to keep up with price rises.
Even in Roman times Emperors were always bankrupting the treasury in order to force armies to expand the Empire if they wanted to get paid, plus bribe those already in their pockets. Salt was used as money as all the precious metals were gone. Hence the word ‘salary’.