Tobold's Blog
Friday, October 10, 2025
 
Debt, budget, and shutdowns

I live in Belgium. Belgium holds a record for running the longest time without an elected government, for 589 days in 2010-2011. The interesting thing about that was how it was organized: Everything continued to function, state employees were paid, benefits were received, the ordinary citizen didn't even notice there was no government. Funnily enough, as no government meant that no new spending could be passed, the rating agencies upgraded Belgium during that time to a better credit rating.

This appears to be in sharp contrast to the United States of America, who manage to have government shutdowns in which people don't get paid while having an elected government. That seems to be a somewhat inefficient way to run a country. On the other hand, it is probably wise to have some mechanism in the constitution that necessitates a minimum of bipartisan support for budgets. Because the truth of the matter is that the overwhelming majority of governments in history spent more than their revenue and accumulated debt.

Every government spending is fundamentally redistributive. If you build schools, taxpayer money from childless families is redistributed to the benefit of those who have children. Social safety nets like health care and welfare tend to redistribute money progressively, from the rich to the poor. But there are also a lot state expenditures like business subsidies that redistribute money regressively, from the poor to the rich. And taxes also can be more progressive or more regressive. End of last year in the UK, there were protests against a tax that specifically targeted only a loophole in inheritance taxes for over £1 million, where millionaires like Jeremy Clarkson pretended to be poor and unable to afford such a tax. Many countries have loopholes that enable most millionaires and billionaires to not pay any inheritance tax at all. Warren Buffett famously declared that he was paying a lower tax rate than his secretary, as in many places passive income from investment is taxed a lot lower than active income from work.

I am old enough to remember US government shutdowns, which were at least in part motivated by Republican fiscal hawks trying to stop Democrats from tax and spend policies. But that idea ended around the turn of the millenium. These days neither party is even remotely trying to balance the budget, and the US national debt has gone up from under $6 trillion at the turn of the millenium to over $37 trillion today. Why?

My theory is that Republicans discovered that national debt is in fact not bad for the people they represent. Ultimately the national debt is only one more government expenditure, for interest payments on that debt. Taxpayer money is redistributed to the holders of treasury bonds. And that is by nature a regressive form of redistribution, poor people don't own treasury bonds. National debt provides a baseline, so-called "risk free" rate of interest, which is important for financial markets. So a lot of people with savings, and a lot of bankers, would be unhappy if the US had no national debt.

Right now, the Democrats profit from the government shutdown by painting the Trump administration as inefficient and cruel, while the Republicans profit by it providing a convenient excuse to cut government spending they don't like, e.g. for federal employees. Behind the blame game, there is bipartisan support *for* a shutdown. So this isn't ending anytime soon. Unfortunately, if it ends, it will end with a compromise on more government spending, not less. There is no political party left with any interest in a balanced budget or a decrease of national debt. The UK learned under the short premiership of Liz Truss how that can quickly go wrong at some point. It is a political game of hot potato, where every administration hopes it will be the next one that has to balance the budget due to a bond market crisis. You gain votes by promising free money and low taxes to your voters, and you lose votes by balancing the budget and lowering the national debt. And even if the US government can't technically default, because they can print their own money, that too has consequences. There is no such thing as free money.

Comments:
"There is no such thing as free money." This is definitively true, but this also include reducing the debt. My understanding of the consensus in economy is that reducing the debt - at least for the US, it might be different for other countries - is not a very good idea.

Keeping it under control is a good idea, but reducing spending might impact the economy and thus the budget more than it helps.
 
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