Tuesday, 10 November 2015

A brief guide to why government borrowing is pointless.

First, let’s consider current as opposed to capital spending. Should government borrow so as to fund current spending? Clearly not. This year’s current spending should be paid for out of this year’s tax.

Now for borrowing to fund capital spending.

One reason to borrow is that if a capital investment is significant compared to any entity’s annual income or turnover, it will suffer a significant drop in consumption if the investment is paid for out of one year’s income. E.g. if you paid for a new car out this year’s salary, that might severely reduce your standard of living this year.

But that point does not apply to governments. The cost of a large bridge or a hundred miles of new road is a minute proportion of total government spending.


Another popular excuse for government borrowing is that it allegedly spreads the cost of capital items across the generations that will benefit from relevant capital items (e.g. bridges). The problem with that argument is that it involves time travel. That is, it just ain’t possible for people in 2030 to sacrifice time, labour, effort etc so as to produce the concrete and steel needed to build a bridge in 2015.

Steel consumed in 2015, unless I misunderstand the laws of Physics, must be produced in 2015 or earlier.


A third reason why microeconomic entities like firms and households borrow so as to fund capital spending is that they just don’t have the necessary cash to fund the capital spending. But that point does not apply to governments. Governments have access to near infinite amounts of cash: first they can grab near limitless amounts off taxpayers, and second, they can print the stuff.

Anti cyclical matters.

A forth reason for government borrowing is to cool down an overheating economy. But if that’s the objective, why concentrate on just ONE sector of the economy, i.e. the “borrow and lend” sector? That is, why not cut a broader range of types of spending by raising taxes and cutting public spending?

To increase government borrowing so as to cut aggregate demand is a bit like placing an extra tax just on restaurants and garages so as to cut demand.

Moreover, if government wants to borrow more so as to cut demand, what it needs to do is to borrow money and do nothing with the money. That’s not borrowing in the normal sense of the word, which is use REAL RESOURCES belonging to someone else and on a temporary basis: the intention being to return those resources to the owner at some stage.


Government borrowing (in the normal sense of the word borrow) is pointless.

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