Sovereign currency issuers – like Australia – can’t “run out” of money
Countries that issue their own currency (like Australia) can always create more money. As long as they do business in their own currency, they can always pay their bills. In particular, they can’t go broke.
Government spending comes before taxation
This one surprises a lot of people. The Australian Government actually spends money into the economy before it can collect any back through taxes.
Most people think our taxes fund Government spending. But this is actually not possible. Because private citizens need to use dollars to pay taxes, and because private citizens cannot create their own dollars, the Government needs to put dollars into circulation before people can use them to pay tax.
Therefore, taxes do not fund Government spending
In fact, taxes cannot fund Government spending. Taxes return money to the Government that the Government must have created in the first place.
Taxes are still important, though!
While taxes do not pay for spending, they are still really important. Sorry – you still have to pay them!
Taxes define the currency, help control inflation, redistribute wealth, and influence people’s behaviour, among other things.
Government Deficits are not ‘Bad’
Budget deficits are a normal part of economic management. Most of the time, the economy actually needs them! If Governments do not run deficits, the only way for an economy to grow is for private people to take on truckloads of private debt.
Inflation is the real constraint, not debt
The key limit on government spending is inflation, not how much income the Government brings in. Governments are not like households or businesses. In the words of the former Governor of the Reserve Bank of Australia, the Government can create money “out of thin air.”
Public ‘debt’ is actually private sector wealth
The Commonwealth Government issues bonds. Technically, these bonds are debt. But because the debt can be so easily repaid, it makes more sense to see these bonds as assets for the private sector who hold them. They are financial assets for the private sector.