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A Government Surplus is a Private Sector Deficit

Darian Hiles

It is well known in economics that the net sum of private, public and foreign sector balances is zero. Thus if the foreign sector is equally balanced by imports and exports, then a federal government deficit implies a private sector surplus. Likewise if the government aims to go into surplus, it must remove money from business, industry and households through increased fees, taxes, etc.

A private industry surplus (public sector deficit) is good policy because it allows further development and expansion and the economy can grow. Thus, arguably, the federal government should always aim to run at least a small deficit. Running a deficit means the government spends more than it receives from taxation, and the net result is that the private sector’s savings (financial wealth) increases. This allows more investment and growth in national income. But if the government runs a surplus, income to the private sector is reduced, thus reducing its ability to purchase goods and services and to finance desired business plans, and so national income falls.

If the private sector reverts to financing its plans through increased debt, sometimes on the assumption that its assets will continue to increase in value (as it did in the decade prior to the Global Financial Crisis), then in the short term productivity and employment will increase, the government will possibly go into surplus (at least temporarily), and the government of the day will bask in glory, as we have seen and continue to see today.

But this debt is fundamentally unsustainable: last-minute financial restructuring and panic debt swaps inevitably produce a dramatic collapse and surpluses are invariably followed by recessions. This process has been spelled out in many well-informed publications, including those of Economic Reform Australia.

Recalling the glory days of a government surplus is mischievous in the extreme, for those days, if repeated, will result in the same disasters that we have seen in the past.

Government surpluses must be generally avoided. Government deficits will always be necessary on average, if we are to grow and avoid similar crises in the future.

Darian Hiles


  1. economicreform

    Hi John, The federal government is different from the state governments in a fundamental way. Namely, the federal government issues its own currency and is monetarily sovereign. This means, amongst other things, that it can create net financial assets – meaning assets unmatched by liabilities (unlike any other entity operating within the broad economy). Thus when the federal government deficit spends, it injects new financial assets into the private sector. Unlike the corporate sector, it has an unlimited capacity to pay interest on all of its public debt (aka Treasury securities), and almost always rolls over those securities when they reach maturity (either by offering a roll-over to the securities holder or by putting them up for auction). Moreover Treasury has at its disposal the services its bank (the central bank, in Australia the RBA), which can act as a lender of last resort if this is ever required.

    Unlike private corporations, the federal government can never go broke, which is why it can always service the interest due on Treasury securities on issue. In actuality Treasury securities are created as a mechanism (whether operated intentionally or unintentionally) for providing the central government with sufficient fiscal space to address problems with aggregate demand and unemployment.

    As I said, when a central government deficit spends, there is a net creation of financial assets held by the private sector. By contrast, when a private bank issues a loan to the private sector (also when it spends), there is no change in net financial assets held by the private sector.

    The net financial asset created by the central government can be thought of as EITHER the Treasury securities issued OR the money spent into the economy. It is simply a matter of perspective. My preferred perspective is to identify the new Treasury securities as the net asset (i.e. with the monetary flow being an effective transfer of money – both credit money and reserves – between different sections of the private sector).

    For sovereign governments, deficits are the norm (for the U.S. over the last 120 years, 85% of annual budgets have been in deficit, and for Australia it is in excess of 80%). There is a reason for this state of affairs: (a) The central bank can only increase the supply of banking reserves if there is an adequate stock of Treasury securities for it to purchase – when that is needed, (b) banks and other large institutional investors like mutual funds, pension funds, superannuation funds, etc require the ready availability of Treasury securities (or their zero risk equivalent) in order to properly manage their investment portfolios, and (c) a federal government deficit translates into a private sector surplus, and vice versa — operating a government surplus simply means that purchasing power has been withdrawn from the private sector; and in this regard it is significant that every attempt to run a government budget surplus has been followed by a recession.

    John Hermann

  2. John Massam

    No, except in an emergency such as cyclone devastation or a war of defence, governments at all levels ought to have no deficits. In normal times, each level of government ought to raise enough money, primarily through a fee for occupying land, to pay its own way. Australia’s federal government is trying to get Local Government mentioned in the federal constitution, pretending that it is covered by each State and Territory by law and/or by custom. “Total Australian debt exceeds three trillion dollars (the most recent data may be obtained from the Australian Bureau of Statistics and from the Reserve Bank of Australia). Almost all of this debt is private, and especially corporate (public liabilities to the private sector amount to only a few percent of total indebtedness).” – , and watch Prof Steve Keen talking at
    – John Massam, of Greenwood, W. Australia; [email protected]

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