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.” This means the government “could spend more to support the German economy and that of its neighbors.” 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. 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.