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Do governments even need to balance the budget?

Politicians warm to money printing to pay for promises.

Jack Derwin

Digital Journalist, Your Money

The Australian government has for years heralded a return to budget surplus (forecast for 2020 and our first in over a decade) as a major economic priority.

But just how important is it that a government balances the budget and why don’t countries just print more money?

Modern monetary theory (MMT) for example, is a belief that countries that print their own currency can simply create more and spend it freely, as long as they are able to keep inflation down, without a need to worry about government debt.

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It’s a theory re-popularised by some American politicians, including New York congresswoman Alexandria Ocasio-Cortez (AOC) and Democratic presidential candidate Bernie Sanders.

“It’s exploded in terms of attention because of the coverage of the Democratic [Party Presidential] primaries and it’s really a panacea – it’s a way of funding any election promise that you want to make, whether it’s a living wage or medicare for all,” fund manager Alastair MacLeod of Wheelhouse Investment Partners told Trading Day.

“There are economists supporting it,” he added.

Typically, when a government makes a promise, they either spend excess money (budget surplus) they already have collected via taxes or go into debt (budget deficit) and pay it back later.

Read: What is ‘quantitative easing’ and can it help the Aussie economy?

However, like many elements of economic theory, there’s not a consensus on how budget balances should be used.

Much of that disagreement comes down to the idea of money and how we understand it since paper currency is no longer linked to a country’s supply of gold.

According to proponents of MMT, because currency is no longer issued relative to a country’s wealth it means there are few restrictions on how much money one can print.

“The MMT school [of economics] basically says to conventional economists, ‘you’re still thinking money should be tied to gold, that’s it a store of wealth and it’s not.’ Their view is that money is just the oil that facilitates transactions,” MacLeod explained.

That interpretation throws traditional economics out the window.

“Typically when a government wants to spend on welfare, or build a road or a bridge there are only two ways to get the money.  You can either get it from taxation or from raising debt – you get the money and then you spend. This is a radical departure from that,” MacLeod said.

“[MMT] says we are literally just going to print money to pay for and buy whatever we want. We’ll have full-employment because for everyone who wants to work, we’ll be able to pay them and they’ll have a job. It’ll solve all of our problems,” he said.

So why then can’t a country just print more money?

Well, if an economy is flooded with it, inflation can quickly get out of control, driving prices higher and higher as happened in Zimbabwe. 

“The way they control it is not through monetary policy but fiscal policy by increasing taxation so they’re going to start taxing people significantly more when there’s inflation,” MacLeod said.

“This is what is incredibly dangerous, that you think you can control inflation when it inevitably appears. In the US, when you have full employment and asset utilisation is very high, it’s like a tinderbox in terms of inflation risk.”

Despite the risks, however, the prospect that a government can print more money will remain attractive to politicians for one simple reason.

“If a politician can look at an idea where he can make whatever promises he wants, he’ll be looking at it.”

Watch the full interview above. 

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