It seems that most if not all advanced economies (US, Japan, UK to name a few) have been running budget deficits since basically the last 20 years. I understand that current debts lose value over time because of inflation and economies grow, but how can they do this for basically ever? I can’t wrap my head around the maths that makes this possible, and the markets don’t seem all that worried
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A note on why deficits at the country level are necessary for most countries. In the US every state government except for Vermont has a balanced budget amendment – that means that it’s illegal to run a planned deficit. Like businesses they have some operating wiggle room but there isn’t room for huge unplanned expenses.
That means that things like disaster relief, funding for dealing with epidemics or other unplanned expenses depend on the US federal government to back the states with infusions of cash to cover the gaps when there are emergencies. There will always be surprises, and there will always be a need to come up with revenue on the fly – the alternative to deficits is maintaining a “rainy day fund” like some states do. That also has issues, it causes voter angst if you’re raising taxes with a few billion dollars sitting in your state piggy bank.
The federal government has the ability to sell government securities to borrow against future revenue – these are bought by banks and then sold to investors. That’s how deficits are funded.
The big debate to be had regarding deficit spending is what sorts of things are appropriate to fund via deficits, and how much debt is too much debt – if the US were ever to become a bad credit risk and have our bond rating downgraded that would seriously hurt our ability to function as a government.
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