The claim that governments must tax or borrow to ‘finance’ its spending is a gold standard mentality which is outdated under a fiat-currency system. Government finances do not depend on Limited taxes and borrowing from the market as propagated by the neoliberals. Government cannot rely on taxpayers or financial markets to supply the cedis it needs. From the start, the only medium by which one can pay taxes or buy bonds is the cedi and government being the sole issuer and the source of the cedi must spend the cedi first, before it can tax. Taxpayers and financial markets can only supply back to the government the cedi they received from government out of its spending. That is to say, to be able to pay taxes or buy government bonds, you need the cedi, which has to be spent first into the economy by government. Government cannot, therefore, tax the cedi that is not spent or not in existence. It is very important to get the sequence right, because government spending precedes taxes and borrowing which is similar to sowing the seed first before it can be harvested. It cannot be the other way round where taxes and borrowing funds government spending, which is akin to reaping where you have not sown and this arrangement cannot be a financing tool to fund government spending.
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What actually fund government spending is the parliament appropriations mandating central bank to mark up and down treasury main accounts via keystrokes at the central bank. Parliament appropriations signed by the president becomes a law to order the central bank to get money into government spending account. The finance minister cannot spend without parliament appropriating spending. Hence, government being the sole issuer or source of the cedi must first spend via check or transfer (crediting private bank accounts) of recipients before it can tax (i.e. debiting bank accounts) or remove the spent money from the economy which are all done mainly through computer keystroke to mark down or up of account balances at the Central Bank. By the way, money now has assumed a different form and is more than just the physical paper thing we hold. It is just numbers and very soon, we will be seeing sovereign digital currency all over the place developed by block chain technology.
Again, most people are not aware that, government finances are different from household or business entity that has budget constraints. To state it in plain terms, the Government is not like a household or business entity as far as money is concerned.
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Government is the monopoly issuer of the cedi whereas the household and business entities are the users of cedi and the two are not the same. The fact is that, all users of the cedis (including you and me and the businesses etc) can’t issue our own cedis and so we face budget constraints. All users of the cedi must earn, sell an asset or draw down saving and/or borrow in order to spend the cedi. This means that, all users of the cedis must finance their spending and they cannot spend more than their revenue forever and cannot sustain to live in deficit forever. Because of the limited supply of cedis, the budget choices facing a household are limited and they always have to stay away from perpetual deficits.
It is wrong to extend this financial constraint argument to Ghana Government, since government has unlimited ability to issue any amount of cedis, has no revenue constrains and can also sustain long period of deficit. Therefore, phrases like “we can’t afford it” or “we’re running out of money” or “the Government is broke” or “Ghana Government is bankrupt” or “the deficit and domestic debt is too high”etc are all false and a myth.When people think money is the constraint on the government’s economic policy, they can be very easily deceived into thinking that fiscal austerity makes sense.
The reality is that all the renowned Economists (Milton Friedman, Abba Lerner, Hyman Minsky, Wynne Godley, Paul Samuelson, Joseph Stiglitz etc,), and also the well-known Central bankers (Ben Bernanke, Alan Greenspan and Mervyn King) know that the deficit and domestic debt mythologies are not true and that a government that issue their own currency and borrow in their currency can never ‘run out’ of money; can never be forced to default in its own currency; can never be forced to miss a payment and is never subject to the whim of ‘ local bond market’. These fears about domestic debt and deficit are driven by an outdated gold standard ideology. To quote Paul Samuelson, “the need to balance the budget is superstition…a myth. It’s like an old-religious doctrine that is used to scare people to believe a certain thing”. The idea of balanced-budget being a myth was a bit like a fairy story we tell to frighten the kids. It was meant to act as an indirect constraint on politicians not to spend unnecessarily. That’s all well and good when the myth doesn’t cause more harm than good.The problem is that, what started as something recognized by economists and policy makers to be a “myth”, came to be believed as the truth and an incorrect understanding was developed. Due to this myth and the belief that government might become insolvent, we are subjecting millions to poverty, denying our people from having good education and good health care resulting in a poor quality life, when all that is required is just laws and numbers which the government cannot run short. Our present monetary system shows that money governs or rules where it ought to serve and many, even the experts, don’t see money as something that is man-made (a tool human beings created for good public purpose),which could be changed anytime we wanted.
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Money is not a finite “thing”, yet our politicians claim there is no alternative but to impose fiscal austerity measures by cutting budget deficits and reducing domestic debt to GDP ratio. Of course, there is an alternative for Ghana government that issues its own cedi, and that is, an effective currency management and significant investment to build the Real Assets base of the economy. What if government takes a position to be in deficit large enough for some time to spend into productive sectors of the economy? The fiscal responsibility argument does not add up for a developing economy such as Ghana. How can government eliminate deficit and expect to maintain a healthy economy? They forget that, the only way the economy (private sector) can net save is when government deficit spend. How can they hate domestic debt but love treasury securities as risk free investment? Well, the only way the government can remove its domestic debt is to remove everyone’s financial assets invested in risk free treasury securities. How can they stop spending and expect the economy to grow? They should know that, a growing economy requires a growing supply of money through government spending. Can someone tell me if unemployment will reduce when government taxes more, cuts income and destroys more jobs which are all fiscal austerity programs?
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Henry Ford said “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow”.If unemployment is persisting, then the government has a responsibility to remove the constraints it has placed on its currency that are giving rise to the problem.
Author: Kwame Ofori Asomaning
