Should Governments Balance Their Budgets?

Mainstream economics generally advocates for balanced government budgets over the long term, viewing persistent deficits as fiscally irresponsible and potentially harmful. The conventional view holds that governments, like households, should not spend more than they earn indefinitely, as this leads to unsustainable debt accumulation. Mainstream economists worry that chronic deficits crowd out private investment, burden future generations with debt service obligations, and can trigger confidence crises where bond markets lose faith in government solvency, potentially forcing default or requiring painful austerity measures.

MMT shows that the household analogy is fundamentally flawed for currency-issuing sovereign governments. As Warren Mosler explains, a government that issues its own currency faces no solvency constraint—it cannot be forced to default on debts denominated in its own currency because it can always create the money needed to service those debts. The operational reality is that government spending creates money, and taxes destroy it; the government doesn't need to 'find' money to spend by taxing first or borrowing from the private sector.

Stephanie Kelton and other MMT economists emphasize that the relevant constraint is not the government's budget balance, but the economy's real resource constraints and inflation. When unemployment exists, government deficits mobilize idle resources without causing inflation. Bill Mitchell and L. Randall Wray demonstrate through sectoral balance analysis that government deficits exactly equal non-government surpluses—so persistent government surpluses necessarily drain net financial assets from the private sector, often leading to recession and increased private debt as households and businesses struggle to maintain spending.

The MMT prescription is that governments should focus on achieving full employment and price stability, allowing the budget balance to fluctuate as an outcome of these policy goals rather than treating budget balance as a goal itself. During recessions, larger deficits are not just acceptable but necessary to offset private sector saving desires and maintain economic stability.