Fiscal Policy and Poverty

Fiscal Policy is the set of rules and regulations by which a government collects money through taxes in order to finance its spending. It is a consequence of the Money as Debt System.

Why the Fiscal Policy is a consequence of the Money as Debt System?

For its expenditures, a government does not sovereignly create money free of debt.

Instead, it primarily gets money out of two sources: through tax collection (the so called ‘Tax System’) or by acquiring a debt (i.e. by issuing the equivalent to Treasury Bonds - salable to private investors - , or by acquiring loans from financial institutions)

Why does not a government sovereignly create money for its own expenditures?

As absurd as it is, the money creation process was historically delegated by Congress to the private banks (see ‘How Is Money Created’). As a result, any time a government does not get enough money through tax collection (scenario known as ‘Fiscal Deficit’, ‘Tax Deficit’, ‘Budget Deficit’, ‘Deficit Spending’ or ‘Deficit Financing’), it either has to cut its budget (by applying ‘belt-tightening measures’) or get into more debt by acquiring additional loans.

As a matter of fact, for 2012 the U.S. Budget Deficit was estimated as $1.33 trillion!.

In order to compensate for such deficit, the U.S. government is in need of borrowing 43 cents of every dollar it is spending. As a result, the nation is acquiring around $5 billion of new debt every business day!

How does a government get a loan to compensate for a Budget Deficit?

It either issues the equivalent to ‘Treasury Bonds’ that the private investors purchase (the money supply for such purchase is created by the private banks out-of-nothing - see the ‘Fractional Reserve Banking System’- ), or gets a direct loan from Multinational Private Banking Institutions such as the IMF (International Monetary Fund), the WB (World Bank) or the ECB (European Central Bank) for example.

As a sub-product, does the Fiscal Policy imply the payment of interests to such private investors?

Yes, it does. In most countries a big portion of the money collected through taxes has to be devoted to the payment of such interests (there are countries where 50% or more of the money collected through taxes has to exclusively be devoted to pay interests).That obviously reduces government’s available money for essential spending.

In 2010, the US for example had to devote around $400 billion (roughly representing 20% of its annual budget) to pay for interest charges!

Is this accumulated government debt what we call Public Debt?

Yes, it is. Ideally when a government prepares the yearly budget it wants to make tax revenue equal to expenses (scenario known as ‘Balanced Budget’). Yet that does not happen always. Especially when the necessary expenditures are critical (i.e. for essential public works) it has to borrow money, augmenting the so called Public Debt.

Isn’t the Tax System within a Fiscal Policy a way to ‘redistribute wealth’?

This is at first sight what the intent is; yet if we go deep into the matter, the true reason for having a money collecting system through taxes is to assure that the private investors (mainly the private banks) are paid their interests on time.

As an example, let’s recall what happened with the EU (European Union) in December of 2011 when it came up with a plan to create a transnational Fiscal Policy.

That Fiscal Policy had to be fulfilled by all members, and their budgets had to get approval from an EU Fiscal supra-body.

Besides representing a loss of sovereignty, member countries were exposed to drastic sanctions in case of breach of such Policy.

The purpose of such Fiscal Policy was to get IMF (International Monetary Fund) and ECB (European Central Bank)’s blessing in order for the member countries to get access to more loans. Let’s not forget that both the IMF and ECB are private banks.

So what is the impact of a Fiscal Policy on Poverty?

On the one hand, since the accumulated Public Debt grows all the time along with the interest on such a debt (see ‘The Rule of 72’), there is less money left for necessary expenditures i.e. public works, social programs, etc.

The so called ‘belt-tightening measures’ imply reducing necessary expenses that would have allowed proper execution of poverty reduction programs, the creation of vital infrastructure geared to sustainable progress, and so on.

Most likely, when a government has the need for budget cuts, what suffer first are the social programs, i.e. programs to assist the poorest members of society.

On the other hand, the bulk of a country’s population gets reduced its purchasing power since it has to devote money to pay for all sorts of taxes. In most countries, it is a common scenario to have a growth on the level of taxes at a higher rate than the purchasing power. The most impacted are specially the people with least income.

What are recent examples of the debt crisis, originated in the Fiscal Policy paradigm?

===> February 2012 is on the one hand a witness of how deep the public debt crisis has touched countries like Greece.

Enforced austerity measures (including a dramatic public budget cut, a significant reduction of the minimum wage, pension cuts, lay-offs, increased taxes), in exchange from additional loans from the ECB (European Central Bank) and the IMF (International Monetary Fund), are paying their toll at the social level.

And to make things worse, such measures are recipe for maintaining Greek economy stalled rather than revitalizing it.

===> On the other hand, Spain, March 2012, is the next example of the debt crisis in Europe. Similarly, the country has reached an unsustainable level of indebtedness after many years trying to compensate its fiscal deficit with loans from the ECB and other private financial institutions.

Strikes, marches, demonstrators clashing with police are just the tip of the iceberg of a huge drama that is touching all levels of the Spanish society.

And again, the formula for Spain from the European economic authorities is austerity which means among other things dramatic cuts in social programs.

===> Despite the efforts to avoid the worst, Spain officially entered recession in April 2012, along with Holland!.

===>And to complicate the panorama even more, April 2012 sees as well the U.K. falling into recession for the second time in 3 years!.

What are the greatest contradictions of the Fiscal System?

The answer to that question starts with another question. Do you think it makes sense that a government for instance, indirectly promotes tobacco and alcohol consumption, gambling and other similar activities, by collecting taxes on those, with the goal of investing such tax revenue on Health and Education? Obviously, it does not. Yet this is what happens in many countries around the world.

On the other hand and as a result of the current money as debt system, the Fiscal Policy favors an ever growing Public Debt, reducing the money supply that otherwise should have been devoted to fight Poverty.

On the same line, the cancellation of Public Debt (also known as ‘Liquidation of Government Debt’) is done at the expense of a great sacrifice. It implies a reduction in the money supply that under various scenarios may trigger recession and unemployment.

In a nut shell, the existence of what we have called a 'Money Collecting System Through Taxes', goes hand in hand with the ‘Money as Debt' system. A significant portion of money collected through taxes has to be devoted to Public Debt payment; that factor alone reduces the money supply that should have been devoted to essential expenses including programs to curb Poverty.

We invite you to explore here, alternatives to the Fiscal Policy and the Money as Debt system that allow to effectively and efficiently fight Poverty.

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