Fiscal responsibility

The dismal science Economics

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António Salazar Karl Marx Phil Gramm Ludwig von Mises v - t - e

“”There is an important point that needs to be stressed to those who regard themselves as fiscal conservatives. By concentrating on the wrong thing, the deficit, instead of the right thing, total government spending, fiscal conservatives have been the unwitting handmaidens of the big spenders.

—Milton Friedman

Fiscal responsibility refers to governments campaigning on smaller deficits, balanced budgets, or budget surpluses. Although necessary to some extent in order to achieve growth and development, it can be economically counterproductive to do so during economic crisis (except when the crisis are caused by the fiscal irresponsibility itself), or to cut spending in all areas, since some, like education and poverty alleviation, usually have desirable externalities and outcomes. Advocates of fiscal responsibility propose policy change with the goal of achieving a lower deficit or larger surplus. Overall, the right advocates to achive fiscal responsibility by cutting spending, but it can also done by increasing taxes, an idea more popular with the left.

Austerity instills a fear in people, beginning with the idea advanced by Adam Smith that the government budget is equivalent to a household budget and snowballing from there (debt ceilings, big government, "living within your means", etc.). Although that’s true to a certain point, government is more than a household, and as we’ll see, it doesn't need to pursue fiscal responsibility all of the time.

Detractors sometimes call it deficit fetishism or austerianism – after wingnut pseudo-theories supported by Austrian economists. Even though Austrian economists are known for their exaggerated fiscal hawkishness (well, the ones who aren't 100% insane, anyways), support for fiscal responsibility exists in most of the mainstream economics schools to some extent.

Views of economists

A common inside joke among economists is that “today’s debt is tomorrow’s taxation", as the debt will have to be paid anyway (and probably not by the meager economic growth that it usually causes).

Most economists agree that a large federal budget deficit has an adverse effect on the economy (83%) and that the gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged (85%). 90% agree however that fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy, so fiscal responsibility can be ignored to a certain point during some economic crisis. However in normal conditions, 80% of the economists agree that sustained tax and spending policies that boost consumption in ways that reduce the saving rate are likely to lower long-run living standards.

Government spending and deficits are not robustly correlated with economic growth when evaluated individually. On the other hand, per capita growth and the ratio of private investment to GDP are negatively related to the ratio of government consumption expenditure to GDP. There is, however, evidence that it in fact slumps growth. In other words, a government that spends too much won’t cause growth, but actually slumps it, and this is even worse if the country spends too much and has a big deficit. As a result, the population pays twice: by higher taxes and slower economic growth.

One of the reasons is because a larger fiscal deficit negatively impacts on the national savings – one of the most important factors of growth. That happens because when the government borrows money to finance the deficit, it reduces the supply of loanable funds available to finance investment by households and firms, crowding out money that households and companies could invest. Fiscal deterioration is also tied with higher interest rates, as people expect to earn more by lending money to the government since the perception of risks are higher and the deficit is too high. This is specially truth to third world countries, but rich countries like US, Germany and Italy are also affected by this. Nobel Prize winner Robert Lucas argued that, since people based their expectations not only in the past, but also in the future, and take into account the inevitable adjusts that the government will have to make. As a result, an active, non counter-cyclical fiscal policy will often just crowd out private spending.

Some fringe economic schools, like Post-Keynesian economics, and in particular Modern Monetary Theory, argue forcefully against notion of fiscal responsibility that is used to motivate austerity programmes, arguing that sovereign governments are not analogous to households, and the economically "right" level of government deficit or surplus entirely depends on the state of the economy at the time (e.g. the level of unemployment). These points have been widely rejected by basically every mainstream economists nonetheless.

Summarizing, fiscal responsibility shouldn't be pursued all the times, nor it should be pursued "by any means". But should, at least to some extent, be the rule, not the exception. The fiscal and monetary policy should be less active when the economy is growing, but it can prevent a larger downfall during crisis, where fiscal responsibility should be put to sleep (unless, like in the Greek case, the fiscal deterioration is the cause of the crisis), and when this moment comes, countries that had been responsible can also provide a better response.

Political support

The principle of fiscal responsibility, together with "sound money", is endorsed by many right-wing parties from various different countries, although it's quite unusual for a country to run on a fiscal surplus.

Left-wing parties sometimes also endorse it. This might happen for two reasons. One of them is to attain credibility with floating voters, rather than because they actually believe in it. For example, in the UK, Gordon Brown pledged prior to the 1997 general election to follow Conservative spending plans for the first 3 years of a Labour government, and kept his promise, after which he was free to increase spending as he had wanted to all along. Ed Miliband tried the same electoral strategy, but his opponent David Cameron defeated him — in part by using the cunning gambit of promising to spend more than Miliband on the revered National Health Service. Clearly, Ed hadn't quite understood how the Brown principle worked — you don't go more Tory than the Tories on spending. Another reason is when the real world imposes by necessity fiscal responsibility, like the Swedish Social Democrat Party knows very well. Another example is the former French president François Mitterrand, who, despite being a lifelong socialist, made a "tournant de la rigueur" and was forced to adopt more rigid fiscal and monetary policy during his presidency after two years of massive failure. Other left-wing leaders that had the same fate are the Italian former Prime Minister Massimo d'Alema and the Spanish former Prime Minister Felipe González.

To a lesser or greater degree, depending on the individual member country and its level of influence within the EU, the European Union has advocated fiscal responsibility. Greece, the most indebted country in the Euro zone, ran for huge deficits for years, and as a result was engulfed by a severe economic crisis. From 2016 to 2019, the hellenic country finally managed to control its deficit and started to run off a budget surplus and, around the same time, the economy started to grow again.

The Tea Party movement has long pushed for a radical fiscal responsibility agenda. Quite how they intend to combine this with tax cuts is left unexplained. This culminated in the Congressional Tea Party Caucus, which advocates for budget surpluses.

Criticism

There have been many criticisms of austerity that have been pushed forward over the years, though they fail to point alternatives. It has has been argued, for instance, that a rise in austerity policies have been directly correlated with an increased rate of suicides and general depression in both Europe and the United States. It's also been argued that austerity measures have also been found to have a negative impact on general health too. In Greece, after health programs were cut, HIV rates went up by 200%, and the country saw its first malaria outbreak since the 1970s, which was directly caused by cutting funding to a malaria reduction program that ended up causing an epidemic "much more costly to control than than the short-term money saved by reducing the budget." Amnesty International has found that Greece's mass slashing of public health expenditures (by up to 47%) directly compounded the already devastating effects of the COVID-19 pandemic, and have debilitated Greece's healthcare system. This sort of criticism however fails to acknowledge that fiscal irresponsibility is a also threat to healthcare. European countries with a lower level of government debt as a percentage of GDP both in 2009 and 2019 had lower COVID-19 fatality rates compared to countries with higher levels of public debt, for instance. A meta-analysis of 69 studies found that one of the most detestable results of fiscal irresponsibility, higher inflation, predominantly negative effect of inflation on life expectancy, mortality, suicidal behaviour, and mental health, with vulnerable socioeconomic groups facing greater risks. Another meta-analysis found that austerity measures after the 2008 financial and economic crisis adversely impacted access to healthcare, calling policymakers to rethink the fiscal agenda, suggesting, for instance, that fiscal responsibility measures should be imposed in conjunction with protective measures for the most vulnerable.

See also

• Liberalism (in a global context)
• Classical liberalism
• Fiscal conservatism
• Libertarianism
• Code word (A climate change-related dogwhistle for corporate greed)