The Reality of Fiscal Deficits (Understanding Political News in 3 Minutes, No. 64)
When we hear news that "the national debt is ballooning," we feel anxious that it is "passing the buck to the future." However, in reality, every developed country continues to carry massive deficits while advocating for fiscal consolidation.
Why does a country keep accumulating debt? It is because the national fiscal system operates on a mechanism completely different from that of a "personal household budget."
What is important in understanding fiscal deficits is not to be misled by the "amount" of the deficit itself. What we should really look at are the two perspectives of "usage (what it is used for)"and"sustainability (whether it can be supported long-term)."
Perspective 1: Usage (What is that deficit used for?)
A country spends more than its tax revenue to carry out projects necessary for the present and the future. Therefore, the purpose of "what that money is being used for" is more important than whether the deficit itself is good or bad.
Government spending can be broadly divided into two purposes.
Investment in the future: Education, scientific research, infrastructure development, etc. These enhance the country's future economic power and, as a result, lead to increased future tax revenue.
Spending to support the present: Social security such as medical care and pensions, and temporary benefits during economic downturns. While these do not directly generate future growth, they are essential for protecting the current lives of citizens and stabilizing society.
Fiscal deficits cannot be called "bad" unconditionally because they can be used to sow the seeds of future growth or prevent crises in current living conditions. What matters is whether that spending aligns with the purpose of supporting the lives of citizens or enhancing the nation's future capabilities.
Perspective 2: Sustainability (Is there a mechanism to keep supporting that debt?)
A country can continue to run a deficit (debt) because it has gained the trust of the market and the world that "this country will be able to pay back its money properly in the future (or maintain the value of its currency)."
Even if they carry similarly massive deficits, the mechanisms that support their sustainability vary greatly from country to country.
United States (Currency power): Because it possesses the "key currency, the dollar," which is used all over the world, it is easy to attract funds from around the globe, allowing it to sustain even large-scale deficits.
Japan (Domestic assets): For many years, high sustainability has been maintained by the public's abundant personal financial assets and domestic financial institutions purchasing government bonds (though this premise is changing due to an aging population).
EU (Fiscal rules): In the Eurozone, member countries have established rules for fiscal discipline. Monitoring systems have been strengthened following the Greek debt crisis, and they are trying to maintain trust in the common currency, the euro, by preventing excessive fiscal deficits.
How much a deficit can be increased is determined not by the absolute value of the amount, but by whether it remains within the scope of the "mechanism to support sustainability" that the country possesses.
Summary: Perspectives we should have when watching the news
The issue of fiscal deficits is not a simple story of "debt equals bad" or "waste equals immediate cuts." It is an adjustment process for maintaining the massive system that is a nation and expanding its future possibilities.
When we see the figure of "XX trillion yen in fiscal deficit" in political news, we need to verify the following two points.
What is that deficit used for? (Usage)
"Is there a mechanism to keep supporting that debt?" (Sustainability)
Instead of just getting emotionally angry about "who is wasting money," one should adopt two perspectives: "What is this deficit being used for, and is there a mechanism to keep supporting it?" That is the very first step toward deciphering the essence of complex fiscal news.
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