For nations enjoying strong terms of trade (and external surplus), it is sensible for the government to run fiscal surpluses and accumulate them in a sovereign fund to create more space for non-inflationary spending in the future.
Answer: False
The answer is False.
The fundamental principles that arise in a fiat monetary system are as follows:
These principles apply to all sovereign, currency-issuing governments irrespective of whether there is a strong external sector or not.
The mistake lies in thinking that such a government is revenue-constrained and that a booming mining sector, for example, delivers more revenue and thus gives the government more spending capacity.
Nothing could be further from the truth irrespective of the rhetoric that politicians use to relate their fiscal decisions to us and/or the institutional arrangements that they have put in place which make it look as if they are raising money to re-spend it!
These things are veils to disguise the true capacity of a sovereign government in a fiat monetary system.
In the midst of the nonsensical intergenerational (ageing population) debate, which is being used by conservatives all around the world as a political tool to justify moving to fiscal surpluses, the notion arises that governments will not be able to honour their liabilities to pensions, health etc unless drastic action is taken.
Hence the hype and spin moved into overdrive to tell us how the establishment of sovereign funds.
The financial markets love the creation of sovereign funds because they know there will be more largesse for them to speculate with at the expense of public spending.
Corporate welfare is always attractive to the top end of town while they draft reports and lobby governments to get rid of the Welfare state, by which they mean the pitiful amounts we provide to sustain at minimal levels the most disadvantaged among us.
The claim is that the creation of these sovereign funds create the fiscal room to fund the so-called future liabilities. Clearly this is nonsense.
A sovereign government's ability to make timely payment of its own currency is never numerically constrained. So it would always be able to fund the pension liabilities, for example, when they arose without compromising its other spending ambitions.
The creation of sovereign funds basically involve the government becoming a financial asset speculator. So national governments start gambling in the World's bourses usually at the same time as millions of their citizens do not have enough work.
The logic surrounding sovereign funds is also blurred. If one was to challenge a government which was building a sovereign fund but still had unmet social need (and perhaps persistent labour underutilisation) the conservative reaction would be that there was no fiscal room to do any more than they are doing.
Yet when they create the sovereign fund the government spends in the form of purchases of financial assets.
So we have a situation where the elected national government prefers to buy financial assets instead of buying all the labour that is left idle by the private market, for example. They prefer to hold bits of paper than putting all this labour to work to develop communities and restore our natural environment.
An understanding of Modern Monetary Theory (MMT) will tell you that all the efforts to create sovereign funds are totally unnecessary. Whether the fund gained or lost makes no fundamental difference to the underlying capacity of the national government to fund all of its future liabilities.
A sovereign government's ability to make timely payment of its own currency is never numerically constrained by revenues from taxing and/or borrowing. Therefore the creation of a sovereign fund in no way enhances the government's ability to meet future obligations. In fact, the entire concept of government pre-funding an unfunded liability in its currency of issue has no application whatsoever in the context of a flexible exchange rate and the modern monetary system.
The misconception that "public saving" is required to fund future public expenditure is often rehearsed in the financial media.
First, running fiscal surpluses does not create national savings. There is no meaning that can be applied to a sovereign government "saving its own currency". It is one of those whacko mainstream macroeconomics ideas that appear to be intuitive but have no application to a fiat currency system.
In rejecting the notion that public surpluses create a cache of money that can be spent later we note that governments spend by crediting bank accounts. There is no revenue constraint. Government cheques don't bounce! Additionally, taxation consists of debiting an account at an RBA member bank. The funds debited are "accounted for" but don't actually "go anywhere" and "accumulate".
The concept of pre-funding future liabilities does apply to fixed exchange rate regimes, as sufficient reserves must be held to facilitate guaranteed conversion features of the currency. It also applies to non-government users of a currency. Their ability to spend is a function of their revenues and reserves of that currency.
So at the heart of all this nonsense is the false analogy neo-liberals draw between private household budgets and the government fiscal capacity.
Households, the users of the currency, must finance their spending prior to the fact.
However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts). Government spending is the source of the funds the private sector requires to pay its taxes and to net save and is not inherently revenue constrained.
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