The way in which a fiscal deficit is addressed is far from being an economic technical problem. Concealed behind the arguments to defend one or another option are critical issues for the country and its population, who dominates, the distribution of burdens and income, the role of the State, what is promoted and what is punished, national sovereignty.
It is beyond discussion that the State needs to make some expenses, what is a matter of discussion is the magnitude of public spending, type and destiny of expenditures and what level of social and managerial effectiveness it should reach. That is, the role of the State and how to handle its regulatory, financial, and managerial capacity.
It is also beyond discussion that the State requires to have the necessary revenues to fulfil the public spending it decides to achieve. The issues in question are the sources of those revenues, their composition, who and in which proportion would contribute those revenues.
It is worth saying that there is no one way of determining public spending and revenue. On the contrary, there are diverse options, each one with different social, economic, and environmental implications. What is this election based on? It is based on the project of country that each society chooses considering expected achievements and consequences. Thus, the election of public spending and revenue, as any other strategic decision, is political with technical restraints whose scope and accuracy are debatable. Further along, we will analyze these restraints.
It is critical to understand how an option is imposed over another one; it depends on the correlation of forces that prevails in each society. It is about democracies captured by minority groups. Thus, the project of country that will guide the definition of public spending and revenue will be one that protects the interests of the appropriating sectors and only subsidiarily it will answer to the needs and interests of popular sectors. Instead, in situations where processes of freeing democracies advance trying to combine political rights with social, economic, and environmental rights, the project of country will impose other courses and trajectories, prioritizing inclusion, equality, justice, caring for the entire population and the environment. Such will be the guide to determine public spending and revenues.
Let’s go now towards fiscal deficit. Once public spending that the State intends to materialize is defined, usually State’s legitimate revenues do not suffice (for different motives that soon we will address), thus, fiscal deficit appears. What follows makes explicit how fiscal deficit generates and how one or another project of country tackles it.
The role of the State, level and organization of public spending
It is worth starting by focusing on the level and orientation of public spending, which is related with the roles assigned to the State by different social forces. If the State is controlled by powerful minorities, what prevails is a State subordinated to their interests, which are concealed as they cannot be defended openly. The widely used argument is that the State should not interfere with market forces; that is, it should not limit the rhythm of profit accumulation that dominators are able to obtain. The strategy imposed by those sectors always relates with deregulating what can be detrimental to their interests while imposing those regulations that favor them. This correlates with the structure and level of public spending, line items and regulations favorable to them are approved, such as subsidiaries to oil and transportation companies, public utility rates that are liberated, construction of infrastructure they need, among various others. At the same time, adducing shortage of available resources, they try to reduce social allocations which are considered costs not rights, such as pensions, health, education, support for small and medium-size enterprises and popular economy, sanitation, urbanization of precarious settlements and other essential services for the population.
As noted, and it is worth highlighting, if the State were controlled by popular base governments, the course and proposed trajectory would be quite different and, consequently, the structure as well as the level of public spending. Expenditures and revenues are far from being independent variables, they are decisions closely related, as we will explain in what follows.
Legitimate and illegitimate public revenues
The State has a diversity of legitimate revenues, related with its attributions. Main revenue comes from taxes although with two tremendous restrictions. On the one side, those who should be the largest contributors (large enterprises and wealthy people with high incomes) tend to evade their tributary responsibility, in plain English, they usually are the largest evaders that flight abroad unregistered profits. With that, they not only underfund the State but also by not reinvesting these surpluses in the country, they sterilize eventual multiplying effects. The other restriction refers to the tax structure that tends to be regressive; consumption taxes weigh heavily, which together with the increase in public utility prices, hit very hard and disproportionally stronger on poor and middle sectors than those with great patrimonies. This is an injustice with devastating social effects.
A second source of public revenue comes from sovereign indebtedness. This source has a tenebrous history; each time the State is controlled by neoliberal governments, huge debts are contracted without taking into account the country’s repayment capability. Thus, countries fall into recurrent situations where they cannot cancel their debts and are forced to face onerous renegotiations. An enormous drainage of public resources is produced to cover interest and amortization payments and thus social spending and public investments needed for development are displaced. Unpaid debts become a mechanism of national submission as for many decades they demand countries to adopt anti-popular policies to guarantee payments to creditors.
Another legitimate source of public revenue is a prudent and well-applied currency issuance. Ever more, in almost every country of the world, it is accepted as a positive factor that dynamizes domestic demand, as long as the printing is in accordance with a fiscal deficit of around 3% of GDP. Beyond such level, macroeconomic imbalances can arise. However, this level can and should be overcome largely during emergency situations such as the double pandemic, neoliberal and sanitary, where the State is the only capable actor to tackle the abrupt drop in production, employment, revenues, care in health and nutrition.
It is worth to make explicit that central countries such as United States and China tend to incur in sideral levels of over-indebtedness and monetary issuance without major consequences. It remains to be seen if this privilege of printing dollars and yens, foreign currencies used for international transactions, can be sustained permanently.
How to address fiscal deficit in a project of country orientated towards good living
It was noted how neoliberal governments address a fiscal deficit, basically they do not touch their privileges and unload the burden of the adjustment onto popular sectors. We will make explicit in the lines that follow how a project of country orientated towards good living can address fiscal deficit.
The main difference between both perspectives is that neoliberal governments consider as invariable data (though never explicit) the large evasion and capital flight, regressive tax structure, biased allocation of public spending and, when the situation gets out of control leap on sovereign over-indebtedness. They do not put into question the “context” in which each country develops. Instead, a project of country orientated towards good living aims at transforming such order imposed as immutable. Let’s see.
We should start by pointing out that good living requires public spending to mainly meet social debt and projects considered strategic for sustaining a new economy. That is a non-negotiable pillar of the good living.
On the other hand, expenditures in productive infrastructure that benefit high- and middle-income sectors must necessarily be addressed applying a contribution to improvements; in this way, they will be carried out without underfunding public spending.
In the same way, subsidies for enterprises covered by public spending should be analyzed case by case to justify destiny and amount; as it happens that some subsidies are needed but others respond to power abuses by dominant sectors. It is fundamental to reduce or eliminate those that do not serve the good living.
Sovereign over-indebtedness should be renegotiated with a firm hand to ease the burden of interests and amortizations. At the same time, it will be necessary to establish firm limits to sovereign over-indebtedness and within that range restrict it to serve good living.
It is clear that a country’s project orientated towards good living foregoes addressing a fiscal deficit with adjustments that cut off social spending. Other solutions must be worked to address a fiscal deficit from the double perspective of enhancing the effectiveness of spending (as it was just mentioned) together with transforming the sources of genuine resources. This includes, dismantling all the mechanisms that large taxpayers use for evading taxes and flight undeclared profits as well as establishing a clearly progressive tributary system where those that have the most fully assume their fiscal responsibility.
Lies and myths in defense of dominant sectors
When options for addressing fiscal deficit are discussed, dominant sectors present fallacious arguments wrapped up as myths. If it were known how they conceal their interests, lies and tricks could be unveiled. Let’s see two examples, among many other cases.
A myth refers to those concentrated sectors as bearing an enormous tax burden, what is a fallacy. Truly, those who suffer an excessive burden are popular and middle-low sectors; those with larger patrimonies do not suffer it because they unload what they have to pay onto the rest. They shelter themselves in biased legislation with loopholes that their advisers know how to exploit to evade or elude their tributary responsibility.
A second case is that dominant sectors victimize themselves permanently by showing their companies’ balances with modest results, even when neoliberalism governs. They say they obtain smaller profits than the prevailing returns in “serious” countries. Bullshit! They obtain rates of return far larger than what they could ever obtain in those countries. What happens is, as we have pointed out, that they tend to be large evaders that flight their capitals abroad. These huge profits are not registered but rather ((are)) accumulated in tax havens and other jurisdictions that are more lenient in terms of taxes and the identification of those who are the true owners of those fortunes.
These types of arguments are used as preventive defenses when enhancements in tax collection are being evaluated to reduce or eliminate a fiscal deficit. The message they try to impose is not to count on them as they are financially very tight.
There are many ways of addressing fiscal deficit but a project of a country orientated towards good living cannot fall into static or partial solutions that end up always punishing popular and medium sectors. Instead, it will apply a systemic perspective where all the variables come into play unveiling those approaches sustained in realities of contexts imposed as immutable. It is necessary to notice that everything mutates, always, almost inevitably, only that those mutations, many unforeseeable, can be facilitated and ordered in favor of good living if democratic State intervenes regulating behaviors, managing conflicts, aligning interests, caring for everybody. Is that State worthwhile? Do we prefer to advance responsibly in peace or reaping social and environmental hurricanes? That is also played when addressing fiscal deficit one way or the other.
If you like this text, by filling out the form that appears in this page you can subscribe to receive once a month a brief summary of Opinion Sur English Edition.