The idea that government spending pays for itself is plainly false.
Austin Glass

Government spending doesn’t have to ‘pay for itself’. Monetary sovereign governments literally create money every time they spend. All taxation does is to destroy some of that money. If the private sector wishes to acquire net financial assets and you don’t run a current account surplus on current account, this can only happen if the government spends more than it taxes. Issuing government ‘debt’ securities is just an asset swap, where the government swaps what is effectively a term deposit at the central bank (the ‘debt’) for a sight deposit at the central bank (‘base money’). It is not essential, but in many countries is used in interest rate management, and to offer safe assets to private sector fund managers. If governments ‘balance the budget’ and the private sector tries to net save, then unless you run a current account surplus there will be a recession. The recession will continue until one or a mix of three things happen — poverty drives down the demand for imports relative to exports; poverty forces the private sector to stop trying to net save; collapsing tax receipts frustrate your intention to balance the budget. Economies without persistent trade surpluses cannot grow for long without the government spending more than it taxes. If they manage to do so for a while, private sector debt will rise relative to GDP and there will be growing financial fragility. Monetary sovereign governments are currency issuers and can never, ever run out of their own currencies, unless they choose to do so. They can never be forced into insolvency. The constraint on government spending is inflation and not (NEVER) solvency. So there are limits to spending, and taxation plays a role, BUT taxes don’t have to ‘pay for’ government spending. Government spending certainly does not have to ‘pay for itself’. As for interest payments on government liabilities, they are new money too, and are mildly stimulative to private spending. But the government does not need to issue them remember -they are about interest rate management. I don’t think you yet understand modern monetary theory, and I recommend this article ; this presentation ; this short book; and finally this blog site . And, of course, Claire Connelly’s brilliant economics journalism.

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