Why doesn’t the state have an interest in making a profit?
If most governments don’t make a profit, it’s simply because it’s not in their interest to do so. In today’s economy, many companies compete with each other, and all want to grow. However, it’s not uncommon for some of these companies to underperform and go bankrupt. The collapse of businesses means fewer jobs and less growth. That’s why it’s in the state’s interest to facilitate competition—by providing aid to small businesses or by not taxing them too heavily, which would otherwise burden them. The same applies to individuals. Over-taxing people with modest incomes will lead to a drop in consumption and a decline in growth.
Part of the reason why the state has no interest in making a profit is that it would mean higher taxes. The result: layoffs, bankruptcies, reduced consumption, and, consequently, slower overall growth.
It’s true that there are other ways to rebalance the state budget, such as austerity. Austerity doesn’t focus on increasing revenues, but on reducing expenditures. The advantage here is that it avoids raising taxes. However, austerity has an impact on public services like health and security, as well as on social aid, development aid, and so on. If these expenses are reduced, it negatively affects society. Poorer health services can lead to more serious illnesses and deaths. Reduced security can result in more crime. Less social assistance can push people into poverty. Less development aid can cause business failures, a lack of innovation, job destruction, and so on. Finally, austerity also leads to lower growth.
Moreover, unlike a private company, the state has no shareholders, partners, or creditors. So what’s the point of making a profit? Under the Lionel Jospin government in France, a budget surplus was proposed. However, in the face of opposition, this surplus was used to cut taxes that year.
How does the state repay its debts?
If it’s not in the government’s interest to make a profit, how does it go about repaying its debts? To answer this question, we need to recognize that an individual’s debt and a government’s debt are two very different things.
Example:
- A person takes on a 20-year debt to pay off their house. They must work to earn money and pay off the debt gradually.
- The government wants to invest in building a bridge. It will borrow money from financial markets for 20 years. The state must therefore repay its debt gradually. This is where the principle of debt refinancing comes into play. The state borrows money from other banks and investors to repay the money it owes. This mechanism can be summarized as follows: the state borrows from A to repay the money it owes to B, and so on.
This is the essential difference between the debt of an individual and that of a State.A mortal human being cannot use a refinancing mechanism, or at least only to a very limited extent. A state, however, is immortal: it is not a person, but an institution. So, not only can it borrow from others to repay its debt, but it can do so indefinitely. The only consequence is a continuous rise in public debt. However, this mechanism can break down if there aren’t enough new investors to repay the old ones.
Why do some politicians advocate tax hikes or austerity if debt isn’t a problem?
Indeed, if a government’s debt can be refinanced ad infinitum, then why worry about the amount? Why fear a large deficit?
First, the thousands of investors and banks that make up the financial markets communicate little with each other or with the authorities. Secondly, from the outbreak of war to a tweet from the CEO of a major company or a political decision, financial markets react to everything, often disproportionately. It’s fair to say that financial markets are influenced by psychological factors, such as fear, rather than being purely rational.
The euro crisis, which began in Greece, is a perfect example of what panic in the financial markets can do. In the wake of the 2008 subprime crisis, Greece, like all European countries, went into debt to save its economy. This indebtedness, combined with several factors concerning the management of the state, led to a decline in confidence in Greece from the financial markets. They feared that the Greek state would no longer be able to repay part of its debt. This fear led to higher interest rates, which in turn increased the country’s indebtedness, which in turn fueled the fear, and so on. The tipping point came in 2010, when the financial markets decided to stop financing Greece. This immediately broke the refinancing mechanism and triggered the crisis.
It was a self-fulfilling prophecy: the financial markets, fearing a default, stopped lending to the government, which ultimately led to the feared default.
What can we do about it?
If the financial markets and debt work the way they do, it’s because various actors and historical events have shaped them. Consequently, if we accept that these mechanisms are the result of construction, then it is possible to change them. Today’s world revolves around money for the sake of money. In this world, profitability and profit are paramount. However, the state plays a special role, as it funds services that are not economically profitable but contribute to the well-being of its population. Health, security, and education represent a high level of expenditure in virtually every country in the world, yet their profitability—if not non-existent—is long-term. Financial markets, which base themselves on figures published annually and focus only on economic aspects, are blind to any approach other than short-term growth.
The solution is here: we need to look beyond the fatalistic rhetoric that portrays financial markets as indestructible. In-depth reform of financial markets requires national and international political will, which makes the challenge a daunting one. However, if tamed, these markets can become a tool for addressing the challenges of the 21st century.
