Sunday, March 15, 2015

The German Government Refuses to Pay Down Its Debt: How Un-German!

How should a government spend a budget surplus? In California, the Californian government put some of its surplus in a “rainy-day fund” in 2014. The following year, the German government made plans to use any surplus in 2016 “to increase investment instead of repaying debt.”[1] This means the government “could spend more to support the German economy and that of its neighbors.”[2] Undoubtedly, the E.U. economy would benefit, especially if the U.S. dollar were to continue to appreciate against the euro. However, the decision not to use even a portion of the anticipated surplus to pay down some of the government debt is problematic.

The German government balanced its 2014 budget—the first since 1969.[3] Achieving a surplus must therefore be quite a feat, rather than easily achieved. Considering the E.U.’s limit on state debt to GDP (3%), not paying down some of the debt in a time of surplus risks breaching the federally-imposed limit when the next recession rolls around.

Looking out to the horizon, paying down debt during years of surplus then switching to a rainy-day fund when the debt has been eliminated could conceivably mean that the government would not have to issue debt during a recession. In fact, building up an “endowment” and opening part of its revenue up to fund the government could conceivably make taxes obsolete! That is to say, were a democracy to be capable of such self-discipline concerning taxation and spending that enough money could be put in a risk-balanced investment portfolio, then more and more of the government’s spending could be funded out of the investment revenue rather than taxes. That a part of that revenue would be reinvested (plus the continued annual contributions to the fund out of surpluses) means that at some point the revenue or even just a portion of which could fund the entire budget such that taxes could be ended. I take this to be the fiscal telos of government.

1. Andrea Thomas, “Berlin Moves to Spend Now, Save Later,” The Wall Street Journal, March 14-15, 2015.
2. Ibid.
3. Ibid.