Six Simple Propositions on Budget Deficits, Public Debt and Money

Abstract

The paper sets out and elaborates on six propositions on budget deficits, public debt and money which should inform debates on fiscal policy. The propositions are:Money availability is not a limitation on government expenditure as the central bank is able to provide any required finance. The key considerations should focus on the issues of the social desirability of the proposed expenditure and the eventual funding of the expenditure.Phrases such as ‘magic money tree’ are designed to confuse and mislead.Proposals such as people’s QE do not enable any stimulus which cannot be obtained from conventional fiscal policy and is anti-democratic putting expenditure decisions in the hands of unelected central bankers.The golden rule’ of public finance (borrowing only for public investment) suffers from the fallacy of treating government like a firm and is comparable to the ‘government is like a household’ fallacy.The target for budget position should be to secure full employment and capacity. Funds would be forthcoming to underpin such a position.Public debt should be judged sustainable (and not excessive) by reference to the level of debt which results from a budget position as forthcoming from proposition 5. Public debt is to be considered as less of an issue (when government can cover interest through taxation and through money creation) than private debt and foreign debt.