Do We Need to Cut Government Spending?

Mainstream economics typically views government spending cuts as necessary during periods of high debt-to-GDP ratios or budget deficits to maintain fiscal sustainability and credibility with bond markets. The conventional view holds that excessive government spending can crowd out private investment, lead to unsustainable debt burdens, and potentially trigger fiscal crises if investors lose confidence in the government's ability to repay. Many economists argue that fiscal consolidation through spending cuts (and tax increases) helps restore confidence, reduces borrowing costs, and creates room for private sector growth by reducing government's claim on scarce financial resources.

MMT shows that for currency-issuing sovereign governments like the US, UK, Japan, and Australia, the question of whether to cut spending should focus on real economic conditions rather than financial constraints. As Warren Mosler and other MMT scholars demonstrate, these governments cannot run out of their own currency and face no solvency risk on domestic currency debt. The real constraint is inflation and resource availability, not government finances. When unemployment is high and inflation is low, cutting government spending removes income from the non-government sector and reduces aggregate demand, potentially worsening economic conditions. Bill Mitchell and L. Randall Wray emphasize that government deficits equal non-government sector surpluses by accounting identity - cutting government spending directly reduces private sector financial balances. Stephanie Kelton notes that the appropriate fiscal stance depends on achieving full employment without triggering excessive inflation, not arbitrary debt targets. MMT's sectoral balances framework shows that when the private sector desires to save and the external sector runs surpluses, government deficits are necessary to maintain income flows and prevent recession.