What else can a government do other than tax, borrow, or scrimp? Governments need to spend some money. Does a government have any other source of income than by borrowing or by some form of tax, whether it be an income tax, an inflation, or the sale of a property it owns?
If a government does not want to fund itself as much, what other choice does it have than to cut spending, to scrimp?
I do not see any other options.
As I write in the spring of 2004, the US government is borrowing vast sums. Much of its borrowing is funded by the Japanese government, which is purchasing US government bonds with Yen created at virtually no cost to the Japanese.
This is a good purchase for the Japanese government, since even if the US dollar falls further in value, the Japanese government, having paid almost nothing for its Yen, will continue to own a claim against the US taxpayer.
However, there may come a time when enough Americans wish to disown others' claims. When that happens, the US government will not be able to borrow. It will have to raise taxes.
The simplest way to raise taxes and at the same time to disown others' claims is to run an inflation. In the US, the governing institutions are arranged such that no one institution can do this alone. Instead, the Executive branch of the government must borrow dollars from the Federal Reserve. In turn, the Federal Reserve must be willing to lend those dollars. It will only lend if the Legislative branch is willing to pay interest on the borrowings. The interest can, of course, be paid by borrowings, at least for some years. If all three groups agree, then money can be created readily. As in Japan, the cost of creating money is low. In addition to the paper work, it involves adding zeros to a computer account. This is less expensive than in the old days, when governments had to print on paper. But even then, `printing money' was cheap.
It goes without saying that inflations, especially large inflations, tend to destroy an economy. I am leaving that aside.
When a government, such as the current Bush Administration increases spending on the military, on drug payments for the elderly, on farm subsidies, and the like, it either must borrow more or raise taxes. There is no other alternative.
The current Bush Administration has cut taxes, so its must borrow more. Indeed, the deficits both it and others predict go on for years. The deficits do not have the look of Keynesian counter-cyclical deficits, since they persist regardless of the state of the economy.
(In the past, some argued that the current Bush Administration wanted to reduce overall government spending. It was said that the Administration had to increase military spending, but would cut back on other types of spending. However, its increases in drug payments and farm subsidies have disproved that argument. It is not a `tax and spend' administration, as people have complained about some Democratic administrations, but a `borrow and spend' administration.)
While a trusted government can borrow for a long time — it can borrow so long as its anticipated increase in revenues is larger than its anticipated costs — there may come a time when anticipated costs rise dramatically, or when the government becomes less trusted. Either problem raises the risk premium for borrowing.
An increase in the risk premium raises the cost of borrowing. Such an increase often precipitates a disownment. The terms used to describe such an action vary. A newspaper may say that a central bank stopped maintaining a `currency peg'; or it may way that a government declared a `moratorium' on certain loan payments. Regardless of the language, the action is to disown a promise once made.