IT is conventional wisdom to think that the state must operate in the same way as households and businesses. If it earns more than it spends, it generates savings that can be spent another day. If it spends more than it earns, it ends up in debt which then needs to be managed wisely, otherwise, impending financial doom. When it comes to undertaking its functions then, the state has to deal with the same problem of monetary scarcity. At the heart of every necessary social and developmental initiative is the issue of funding.

Curiously, it is also uncontroversial to believe that the state is the only source of the Philippine peso, the country’s fiat currency that functions as the dominant means of exchange, unit of account and store of wealth within its borders. Largely all economic activities that result in the mobilization of materials and labor in the country require this money.

If both of these propositions are true, how is it then possible that the state can ever be faced with the absolute scarcity for such a thing that it (and only it) can create ex-nihilo? This is then conventionally answered with the common sense of outright money creation leading directly to wild price hikes, government borrowings crowding out private ones leading to higher interest rates with the accumulation of debt reflecting slovenly statecraft. Vividly horrific illustrations of the likes of Venezuela, Zimbabwe and Weimar, Germany predictably follow.

Even if we considered such responses to favor sound State financial management, it cannot have escaped our senses that the state taxes (spends) money out of (into) somewhere. If it is ideal that the State persistently earn a surplus — as the Department of Budget and Management says it should as a matter of policy — it follows that the aggregate that is the private sector, from which more money in taxes is extracted than spent into, must experience the opposite. Every realized monetary transaction between private sector entities cancels out. One’s revenue is another’s expense and any money acquired from debt is always accompanied by a liability. Even if we factor in a foreign sector that transacts with both the State and the domestic private sector, it must be the case that a surplus (deficit) in any one of them must result in a deficit (surplus) in at least one of the others. In domestic terms, if the State taxes more than it spends, the private sector must reduce whatever store of money it had previously accumulated. This is an accounting identity by definition.

Orthodox ideas about market economies place the impetus of growth on private sector economic activity. They also recognize that the provision of necessary public goods must essentially rely on government spending. Such expenditure is also necessarily the primary source of net monetary wealth in the domestic private sector. Given these, is the conventional reliance on the ideas of fiscal discipline and surplus budgeting ideal? Considering the fact that the government hasn’t accomplished a surplus in decades, is it even necessary? What if the government had more money to spend on improved public services and social/developmental initiatives without the strict constraints that we’ve grown accustomed to fetter it with? Must the state behave like a household or business?

For our knowledge about modern state money-mediated economies like ours to be filled with these contradictions, the latter must be a complex and open system. If society is ever to get the most out of them, we can’t afford to maintain sacred cows that constantly evade serious critical challenge.

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