The central government of sovereign nations possess the authority to issue currency in their respective countries. The government solely manages the expansion and contraction of the currency through taxes and expenditures. The government’s only issue is productively and intelligently utilizing its resource availability. We can observe this in several nations where, through incorrect fiscal policies, the human and the natural resources and assets are ignored and thus wasted. These issues can be mitigated by leveraging the power of the central government to
create currency and implement and amend the necessary rules and regulations to ensure a healthy balance in the nation’s economy and growth. The priority of government fiscal and monetary policy should be maintaining full employment, food security, energy security, and critical
technologies. Therefore, as a vital tool in nation-building, fiscal policy underscores the importance of understanding these concepts to be informed and knowledgeable about the economy.
Responsible Implementation of Fiscal Policies
Firstly, the government can create more currency for better employment opportunities to ensure enough demand for the goods and services being produced. Sustainable employment opportunities can be generated by focusing on developing and enhancing essential and socially beneficial infrastructure. The example of the United States, Germany and China show us that through responsible implementation of fiscal policies the growth of the economy can be both sustainable and healthy for the nation. In the year 1933, the United States implemented a policy known as the New Deal. This policy employed the citizens in various public works projects and laid a strong foundation for the country’s economy. Similarly, Germany introduced a comprehensive policy to ensure jobs for all individuals and thus made unemployment illegal. This eventually resulted in extensive job creation and progress in various sectors such as agriculture, industry, and infrastructure. On these similar lines in the 1990s, China also adopted comparable financial and administrative policies that created extensive employment opportunities. In addition, fiscal policies can also be used as means to redistribute income and wealth among the citizens of the nation. This can be achieved by changing tax rates on different levels of income or wealth.
Sovereign Nations Aren’t Households
A common misconception is that sovereign nations, like households or businesses, must “balance their books” and ensure they don’t spend more than they collect. This idea leads to unnecessary anxiety over deficits and debt.
Think of a government with its own currency as the banker in monopoly—it never runs out of money. The real issue isn’t how much money the government has but what it can do with it. Like in a game, the true challenge is managing resources : labor, energy, technology. This myth distracts from the real issue—resource constraints. Sovereign nations have the fiscal flexibility to spend more than they collect, as they can issue currency. However, no amount of money can fix shortages in critical areas like skilled workers or energy supplies.
What are these numbers ?
Lets get familiar with some financial jargons, so that we can deep dive
Fiscal Deficit = Total Expenditures − Total Revenues
Explanation:
Total Expenditures : This includes all government spending, such as salaries, infrastructure, social programs, and interest on debt.
Total Revenues : This is the money the government collects, primarily from taxes (income tax, corporate tax, sales tax) and other sources (fees, fines).
A fiscal deficit indicates that the government is spending more than it earns, which often leads to borrowing. A persistent fiscal deficit can raise concerns about long-term financial sustainability.
Government Balance = Total Revenues − Total Expenditures
Explanation:
This formula is similar to the fiscal deficit but shows the balance.
A positive government balance (surplus) means revenues are greater than expenditures, allowing the government to save or invest extra funds.
A negative government balance (deficit) indicates that the government is in the red, necessitating borrowing to cover its obligations.
The government balance reflects fiscal health and can influence decisions about spending, taxes, and debt management.
Foreign Balance = Total Exports − Total Imports + Net Capital Flows
Via the magic of accounting, Private Sector Balance + Government Balance + Foreign Balance = 0
What does the Data say ?
When we examine historical data on fiscal deficits, it becomes clear that significant events such as wars, economic crises, and global pandemics often lead to dramatic spikes in government spending.
For example, during World War II, the U.S. government ramped up spending to support the war effort. This led to a substantial fiscal deficit as military expenditures skyrocketed. Between 1940 and 1945, federal outlays increased from around $9 billion to over $100 billion. The deficit reached approximately 30% of GDP in 1943.
This type of over spending results in increased debt, which somewhat have long lasting effects on national debt.
Additional significant events that illustrate this trend include the 2008’s Bank bailout and quantitative easing, the 2020 COVID-19 pandemic, etc. Each of these instances prompted substantial fiscal responses, leading to spikes in government deficits and subsequent increases in national debt.
The Deficit/Surplus percentage of GDP graph shows a decline in surplus from 1990 to 2000, followed by deficits from 2001 to 2008. Significant fiscal spikes occurred in 2009 (-10% of GDP) due to the financial crisis and 2020 (-15% of GDP) due to the COVID-19 pandemic. These crises triggered substantial government spending, leading to notable increases in deficits, with 2009 and 2020 being the most prominent years.
The Real Limit: Resources, Not Dollars
A sovereign nation’s real constraint is not how much money it has, but how much it can do with its resources.Governments can print more money, but they just can’t print resources.
Shortages in areas like energy, skilled labor, or food create real economic limits. These are the factors that truly restrict what a government can achieve, not its deficit.
Priorities for Policy
To address these issues, the focus of government monetary policies should be on the right priorities.
Full Employment : Keeping everyone engaged and contributing to the economy. Idle hands represent wasted potential.
Food and Energy Security : Without food and energy, everything stops.
Investment in Technology : Investing in innovation ensures a nation stays competitive and future-proof. “Today’s tech is tomorrow’s survival kit.”
Inflation Control : The government should keep inflation in check to ensure stability. If too much money is chasing too few goods, inflation can erode purchasing power.
Governance Integrity: Maintaining trust in government institutions is essential. A broken system, no matter how well-funded, won’t function.
The US National Debt Held by Public percentage graph shows a steady increase, with spikes during crises. The debt percentage rose gradually from 2001 to 2008, then surged in 2009 due to the financial crisis. It continued to rise, reaching 100% of GDP by 2019, and skyrocketed to over 130% in 2020 due to the COVID-19 pandemic. Crises like wartime, financial crises, and pandemics lead to significant increases in debt.
The Debt Issue
The debt rises whenever a spike is noticed in the fiscal deficit, as we can see in the graph.
The debt rises rapidly after 1986, 2008, 2020 and many more such extraordinary event.
Concerns about national debt and deficits often dominate discussions about fiscal policy. While it’s important to consider the implications of borrowing, an excessive focus on debt can divert attention from more pressing issues.
Focusing on national debt is like worrying about the air miles of a plane that’s running out of fuel. The real issue isn’t the debt, but whether the nation has the resources to meet its needs.
Conclusion
Sovereign nations that issue their own currency, such as the United States, are not constrained by fiscal deficits in the same way as households or businesses. They can fund their spending by money creation, so their real constraints come from resources, such as labor, energy, or technology. In its emphasis on government debt and deficits, fiscal policy has misled policymakers and the public. It should focus on resource management and economic growth instead.
For instance, during the Clinton years, there had been a private sector deficit caused by the U.S. budget surplus. The government deficit had soared in 2008 during the financial crisis; tax revenues had plummeted not because the government was over-spending but due to private sector debt and economic contraction. It is expansionary fiscal policies that stabilized the economy while proving that deficits can also be used in the management of economic downturns. Policymakers wrongfully demanded austerity when they could have attributed increasing deficits to a generally depressed economy rather than mismanagement by the government.
The U.S. national debt has always increased sharply during crises like that witnessed during World War II, the recession of 2008, and lately, the COVID-19 pandemic. Even though debt spikes are considered concerns, that money was needed to implement support initiatives in the economy. After WWII, even though there was a high amount of debt, the U.S. witnessed tremendous growth, which confirms that with the right fiscal policies managed well, debt concerns can be overcome if they concentrate on productive investments.
Government should focus on resource constraints rather than deficit policies. Fundamental goals include full employment, food and energy security, and investment in new technologies. Controlling inflation is necessary simply because too much money without corresponding goods and services is inflationary. Experience with the U.S. economy shows that the practice of sovereign nations utilizing deficits to respond to real limits on resources is better than balancing the budget.
In conclusion, sovereign countries are not constrained by fiscal balances but real resources. An example that explains this includes the case of the United States where government deficits have played an essential role in the stabilization of the economy, especially during periods of crisis. It is also important to say that issues of national debt must at all times be placed within an appropriate economic context. Effective fiscal policy will indeed mean optimum resource utilization, help to the private sector, and sustainable economic growth instead of obsessions about debt and deficit levels. It will first focus on managing resource constraints along with maintaining control over inflation to ensure that the economy remains stable while bringing maximum potential for growth and development in the future.
References And Citations
“Fiscal Policy for Full Employment and Nation Building : Understanding the Modern Monetary System and the Role of the Central Government” presented by Dr Raj Kumar Singh, Professor, Delhi Technological University, Delhi.
