bearskin

and interesting. It's bit above basic understanding how things work, but not so out of reach that more people could/should get it.

LoCarb

Yes, governments spend first then tax the money back.
It's why they are never financially constrained, only resource constrained.
They don't need your taxes to spend.

It's a simple concept, unfortunately they don't teach economics students this, so you would be hard pressed to find an economist that understands it.
(unless they are Modern Money MMT economists).

So next time you hear a politician say we can afford it, you know they are either ignorant or lying.

Woodlea

But there is a limit to how much tax can be raised, so there is a limit to how much can be spent surely?

LoCarb

Government spending isn't reliant on tax take.
They are separate operations.
The government doesn't spend the tax it receives because: the NZ government has the exclusive sovereign authority to issue the NZ dollar. That's why it's the government. We (the private sector) need NZ dollars because it's the only way we can extinguish our tax liability which the government has imposed on us.

So, the government spends first, then it taxes back the money it has spent.
If it didn't reduce the money in circulation, and kept spending, there would be run-away inflation (too much money in the economy).
Operationally, taxes simply provide the space for government to spend again.

OK, I know you are going to ask: so what happens to the taxes once the government receives them. Simple ...nothing happens to them.
The money is extinguished. It's the end of the line for it. Circular flow completed.

Fiat money (like we have) is just a social contract between two parties, it's not a commodity like gold or silver. It doesn't have any intrinsic value, it's worthless in-of-itself.
In that contract, there is always a debtor (and balanced by) always a creditor.

So, the government purchases goods & services from the private sector by issuing NZ dollars (coupons if you like). The government is now the debtor part of the social contract.
The private sector receives payment with government coupons for the goods and services it provides to the government, and become the creditor part of the contract. Then when you pay your taxes, those coupons are redeemed by the government and canceled.

Any IOU is always canceled once redeemed by the issuer.
You borrow a cup of sugar from you neighbour and you issue an IOU. "IOU one cup of sugar".
You return (pay back) the sugar at a later date, the neighbour give you back your IOU and you screw it up. End of contract!


Yes there are limits to how much the government can spend, there are real resource constraints in the economy, but not monetary constraints.
If the government spends more than the economy can produce, there will be inflation.

PS: There are plenty of eminent economics professors who can explain more on this.
Just Google Modern Money (MMT)

Charismatic

The question is if that's going to be due to rising mortgage rates or a collapse in employment. Reserve banks have shown a trend where they are excellent at lowering rates (or undertaking QE) but very reluctant to raise rates. Wholesale swap rates indicate that the market is pricing early rate rises as a very low probability.

At the moment there has been an uptick in listings in Auckland (which is the most severely overpriced market) but people aren't crowding the exits in panic. Might just be an election year jitter as Labour have tended towards modernising the tax system and have been polling better.

LoCarb

Doesn't have to be either, although they would accelerate it.

Rising indebtedness is a function of a deregulated economy and a government that is fixated with fiscal surpluses and reducing government debt.
The function of government debt is to allow the private sector to save.
If the government pays down it's debt, it is in effect wiping out private savings and forcing people to borrow (see MMT).

Also, through it's neoliberal ideology, the government is/has extracted itself from the economy and allowed private enterprise to fill the void.
Private enterprise of course wants to make profits, and this is at the expense of the general population who are now expected to pay for services that government once provided free, or at cost.

A deregulated housing market has become a means of making tax-free capital gains at the expense of the working poor.
Not much will change there, as most MP's have their snouts in the trough.
My local MP has twenty-one rental properties

All this money pouring into the housing market is a waste of capital.
Instead of it being used for productive purposes and increasing employment and real wealth in the economy, it just ends up in the dead-end housing market.

We are not alone.
Australia is heading the same way:

Government mismanagement and Australia’s ticking time bomb of debt.

https://independentaustralia.net/pol...-of-debt,10153

LoCarb

Best 5 minutes you'll spend today

Should the government run a surplus?