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.
