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Governments often say things like "we will reduce the deficit by 2025".

Why can't they simply eliminate the deficit immediately by spending less than the taxes they receive?

Surely if a country is in debt, it should try and run a surplus so it can start paying off it's debts and reduce its interest payments.

Is there some reason why they can't do this?

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    $\begingroup$ If they cut services, they get voted out of office. $\endgroup$ – zeta-band Aug 21 '18 at 17:32
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    $\begingroup$ So you're saying they are deliberately taking the country towards bankruptcy just to stay in power for a couple more years and keep their government cars? $\endgroup$ – zooby Aug 21 '18 at 22:39
  • $\begingroup$ Japan is a good example: Japanese voters would rather lend money to the government than pay higher taxes, even though interest rates are minimal. The Japanese government's debt is very high, but Japan as a whole is not indebted $\endgroup$ – Henry Aug 21 '18 at 23:02
  • $\begingroup$ Because there are many pork barrels receivers to build unwanted "infrastructure" by using excuses such as "ripples effect to the economy". And this compound with the cost to maintain those white elephants. In addition, most governments simply playing kicking the bucket game over the next generation, by speculate population growth to absorb the deficits. One can watch how Japan population growth deficit reveal the bucket kicking problem. $\endgroup$ – mootmoot Aug 22 '18 at 7:43
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Some countries have very strict fiscal rules that basically force them to keep on spending more, or reduce the government's ability to cut spending (Brazil is a good example). Other countries have looser rules, but can't cut because of political pressures.

Remember acute spending cuts mean less money for hospitals, schools and many other services that rely on public money. It's often a very impopular measure.

That's why economists often favor clear, well-defined spending rules. Such as establishing a primary surplus target during times of economic growth, a maximum deficit during recessions and maybe a debt/GDP ratio ceiling.

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This strategy works perfectly well for an individual, household, or company, because for these entities, there is no link between income and expenditure. Each one can cut expenditure and expect to continue to earn the same income. Governments do not work like that.

Most government income is highly dependent on the overall level of activity in the economy. If the government quickly reduces expenditure, this will almost certainly* lead to reduced employment, reduced investment, reduced tax receipts, and push up variable forms of government expenditure like unemployment and low-income benefits.

The result tends to be a massive contraction in economic output, and often an increase in the budget deficit, increasing the government's debt and reducing its ability to repay.

Here is a 4-minute summary of this point by Yanis Varoufakis.

There is also an obvious social cost to reductions in government expenditure. For instance, mild austerity in the UK since the global financial crisis caused around 30,000 excess deaths per year by 2015. Killing tens of thousands of your electorate each year can prove politically costly. The level of austerity required to balance a substantial deficit within a year is likely to have a much more extreme human cost.

*There are a few potentially large types of government expenditure that could have minimal effect on the domestic economy, e.g. purchase of foreign military equipment.

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  • $\begingroup$ Reduced spending will obviously lead to reduced employment in public services. But its cheaper to pay someone unemployment benefit than employ them as a nurse. So benefits cost won't rise. Also this will leave a gap in the market for private healthcare. So surely reducing public spending will increase economy? Countries who spend lots on public services like Cuba and USSR have terrible economies. $\endgroup$ – zooby Aug 22 '18 at 21:07
  • $\begingroup$ You make a nurse unemployed, and save the difference between his/her net salary and the benefits they then receive. But you've missed the impact of their reduced spending. This takes demand out of the economy, reducing private sector employment. Tax take goes down, benefits go up. That additional reduction in employment reduces demand further, and on, and on. This is the multiplier effect. The IMF initially underestimated this effect, which is why they thought austerity would work, before changing their minds when the evidence was in. $\endgroup$ – Dan Aug 23 '18 at 12:15
  • $\begingroup$ But that is spending that has been given to the nurse by the tax payer. So that's equivalent to reducing taxes on all workers. No more money has gone into the economy its just spread around differently. So basically the IMF have no idea if they change their mind all the time. $\endgroup$ – zooby Aug 23 '18 at 16:18
  • $\begingroup$ It is nothing like reducing taxes on all workers, unless you reduce tax on all workers. If you simultaneously reduce tax on all workers, then you would obviously have no impact on the deficit. $\endgroup$ – Dan Aug 23 '18 at 17:09
  • $\begingroup$ But paying a public servant so they can spend more money on workers means workers will have more money so that's equivalent to reducing taxes on workers. So reducing taxes on workers by avoiding paying a public servant cancels out everything. In other words it doesn't benefit workers or the economy in general to employ a public servant. $\endgroup$ – zooby Aug 23 '18 at 17:26

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