James d. Gwartney

Avoid Excessive Spending and Deficits
The attractiveness of financing spending by debt issue to the elected politicians
should be obvious. Borrowing allows spending to be made that will yield
immediate political payoffs without the incurring of any immediate political
cost.
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— James Buchanan, 1986 Nobel Laureate
When a government’s spending exceeds its revenues, a budget deficit results. Governments
generally issue interest-earning bonds to finance their budget deficits. These bonds comprise
the national debt
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. An annual budget deficit increases the size of the national debt by the
amount of the deficit. In contrast, when government revenues exceed spending, a budget
surplus
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 is present. This allows the government to pay off bondholders and thereby reduce
the size of its outstanding debt. Basically, the national debt represents the cumulative effect of
all the prior budget deficits and surpluses.
Video:
Does Government Spending Create Jobs?
Prior to 1960 the consensus among economists was that, while debts typically
increased during wars, it was the responsibility of governments to run budget surpluses to pay
down these debts as quickly as possible. There were major debt reductions in the United
ELEMENT 3.6
Unless restrained by constitutional or other strict rules, legislators will run budget deficits
and spend excessively.

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Kingdom in the century following the Napoleonic Wars, in France following the Franco-
Prussian War, and in the United States following the American Civil War.
The Keynesian revolution changed all of this. The English economist John Maynard
Keynes developed a theory that provided both an explanation for the length and severity of the
Great Depression and a remedy for prevention of such events in the future. During the 1940s
and 1950s, the Keynesian view swept the economics profession and it soon dominated the
thinking of intellectual and political leaders. According to Keynesian analysis, government
spending and budget deficits could be used to promote a more stable economy. Keynesians
argued that rather than balancing the budget, the government should run budget deficits during
periods of recession and shift toward a budget surplus when there was concern about inflation.
While the effectiveness of Keynesian fiscal policy is a point of controversy, its impact
on the budget of most countries is clear. Freed from the balanced budget
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constraint,
politicians consistently spent more than they were willing to tax. Over 22 years, from 1995, the
Greek government ran twenty deficits and two surpluses. Exhibit 20 shows the path of the
Greek government deficit measured as a share of GDP during this era. The deficits were larger
during recessions, especially during the financial crisis in the years 2008–2009. The
government deficit averaged about 6.5 percent of GDP before the financial crisis, and the era
of deficit control was exceedingly short. Greece only managed to switch to surplus in 2016 and
2017.
Deficits push the national debt upward. Measured as a share of GDP, outstanding
general government debt in Greece rose from 97 percent in 1995 to 134 percent in 2009, and
183 percent in 2015. Greece’s public debt is the highest share of GDP in the E.U. Besides
Greece there are four other European nations where debts exceed 100% of annual economic
output (Belgium, Cyprus, Portugal, and Italy).
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