On Budget Deficits and Capital Expenditure

It has almost become the conventional wisdom that there should be rules governing the size of the budget deficits, without regard for the impact of such deficits on the macro economy. This is reflected in the push for a balanced budget in the United States and the 3 percent deficit to GDP ratio convergence criteria in the Maastricht Treaty (and designed for observance by countries signing up for the single currency). The purpose of this paper is not to present further arguments against deficit reduction for its own sake or against the balanced budget for that has been done by others. The purpose is rather to consider the arguments which have been done by others. The purpose is rather to consider the arguments which have been advanced in favor of a budget deficit limited by the capital expenditure budget separate from the current expenditure. The structure of this paper is as follows. We first consider some possible rationales for the so-called ‘golden rule' that current expenditure by government should be covered by taxation and capital expenditure may be financed by borrowing. The next section points out the ways in which the government sector should be treated differently from the private sector in matters of deficits and their financing. The application of any ‘golden rule' is dependent on how capital expenditure is conceptualized and measured, and that is discussed in section 4. The next section suggests ways in which the ‘golden rule' may lead to some problems. Section 6 provides some further discussion on the debt stability condition, and section 7 is a brief conclusion. The central point which is at the heart of this paper is the current expenditure and capital expenditure by government have the essentially similarities that they use current resources, have to be financed but do not yield a direct monetary revenue for the government.(This abstract was borrowed from another version of this item.)