# Can a country exist without running a deficit?



## RMCF (1 Dec 2011)

Looking at all the figures bandied about recently, and seeing how in debt major nations such as the US, UK etc are, I was wondering if its possible for a country to run itself on what it brings in in tax i.e. never borrow?

I know individuals who are in no debt. If they cannot afford something, they don't have it. If they want it, they save for it.

Could a country realistically never borrow and be self sustaining?


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## WindUp (1 Dec 2011)

Germany seem to manage it --not sure if this list is govt debt or national debt!

http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance


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## jpd (1 Dec 2011)

Ity's very difficult in a democracy because

Voters vote for politicians who promise them goodies
Once in power, the only way to pay for the goodies is to borrow money as invariably they have promised more than the country can afford
So they government of the day borrows as much as it can - unfortunately eventually, the lenders call a stop to it by refusing to lend so country has to go on a diet until it is possible to borrow again.

It is a bit unusual for whole swathes of countries to get away with borrowing for years, but that's what happened over last 10-15 years


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## Paddyman (2 Dec 2011)

Nazi Germany claimed autarky but then they just  robbed what they wanted from their neighbours and even the huge conglomerates, many of which are still in business, had a plentiful of slave labour.


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## Chris (2 Dec 2011)

jpd is absolutely right. The only reason countries accumulate debt is because politicians promise way more then they can afford and with their short term sights on the next election they go and borrow money.
The US was extremely successful in the 19th century with minuscule amounts of debt. Those debts that were taken on were mainly from its own people and mainly used to fund wars. 
Countries would be un much better shape if they were constitutionally forced to balance the budget, and politicians were forbidden to borrow even one cent from anyone.



WindUp said:


> Germany seem to manage it --not sure if this list is govt debt or national debt!
> 
> http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance



That list is not debt it is the current account balance. The German state is very heavily indebted and is running deficits.


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## dewdrop (2 Dec 2011)

RMCF this often occured to me too. Without checking figures i suspect that in the forties and fifties in Ireland there was little government borrowing but on the other there was no progress.


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## Shawady (2 Dec 2011)

This is something that occured to me too. Are there any countries with no debt?


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## Sunny (2 Dec 2011)

Can't imagine there is any country without debt in some form.

Sometimes it simply makes sense to borrow for certain things like capital spending. There are companies that generate huge cash flow and profits but still have debt on their balance sheet even if technically they don't need to borrow e.g. Google. Countries are no different. The problem is running huge current deficits to pay for the day to day running of a country. This is unsustainable.


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## shnaek (2 Dec 2011)

Shawady said:


> This is something that occured to me too. Are there any countries with no debt?



Japan is a net lender to the rest of the world, afaik. The government has huge debt alright, but it is mainly owed to Japanese institutions.


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## RMCF (2 Dec 2011)

WindUp said:


> Germany seem to manage it --not sure if this list is govt debt or national debt!
> 
> http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance



Don't believe Germany has no debt.

Surely any countries which has to go to the financial markets and try to sell bonds is in debt? No?

And Germany had a bond auction partially fail only a couple of weeks ago.

From what I gather, all countries seem to be in debt. Or are China not in debt, as they seem to be lending money to the rest of the world?

And if *every *country is in debt, who do they owe it to?


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## Sunny (3 Dec 2011)

China has debt despite them denying most of it. Indeed many analysts suspect that chinas debt to gdp ratio is well over 100%  There are plenty of countries who run current account surpluses including Ireland (it's why we will get out of this mess quicker than some other countries). Debt in itself is not a bad thing. It's the amount of debt that countries have run up that is the problem.


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## horusd (3 Dec 2011)

Running a balanced budget wouldn't work. As Sunny says countries need to borrow and not all borrowing is bad, in fact it can be wealth-generating. The problem isn't borrowing per se, it's _imprudent _borrowing. As a rule of thumb,borrowing to fund day to day spending is bad. 

But we also have a ideological, social and economic problem: we are addicted to growth, and economic growth has become the objective and measure of well-being.  The inherent premise is that the more wealth the better the country, the happier the people. This is patently false, or at least substantially false.  As the philosopher Khalil Gibran (_The Prophet_) says "Beware of comfort that enters your house as a guest and becomes the master."


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## Complainer (3 Dec 2011)

I was a big fan of the idea of paying down debt during the boom years, but I guess this never happened. Apart from the economic issues, there is also the risk issue. Currencies are vulnerable to speculators where countries need to borrow. If countries don't need to borrow, they don't need to worry about speculators - so there is much lower risk.


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## Purple (3 Dec 2011)

Two points;
The proportion of a countries debt that's Internal and external matters. When we pay back German bond holders money leaves the country, when we pay back our banks (yes, they used to buy government bonds) then the money re-enters the economy.

We did pay back much of our debt during the bubble years but spending was/is so out of control that our debt exploded when the bubble burst.


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## Protocol (5 Dec 2011)

When discussing deficits and debt, you have to distinguish between:

*(1) fiscal deficits (Govt)*

and (2) *external deficits* (the whole nation), also known as the Balance of Payment current account deficit

Here is a relevant equation from macroeconomics:

*(private sector borrowing/saving) + (public sector balance) = BoP current a/c balance*

(S - I) + (Tax - G - Tr) = BoP Current a/c balance


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## Protocol (5 Dec 2011)

All of the EU nations run a fiscal deficit, but many of them have a national surplus (current a/c surplus).

Ireland has a huge fiscal defict, but this year we will have a surplus on the current a/c of the Balance of Payment.

*So the Govt will borrow, but the nation as a whole will save.*


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## Protocol (5 Dec 2011)

RMCF said:


> Don't believe Germany has no debt.
> 
> Surely any countries which has to go to the financial markets and try to sell bonds is in debt? No?
> 
> ...


 
Again, be careful to distinguish between *Govts* and *nations*.

The German govt runs a deficit and has build up a debt, like most other Govts.

But the German nation runs a 194 bn USD external BoP surplus.

So I suspect the German nation, incl all sectors, has net external assets.


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## Protocol (5 Dec 2011)

Here is some data from 2009 on the EU surplus / deficit:

[broken link removed]

EU27 = -128BN deficit = -1.1% of GDP (small)


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## Protocol (5 Dec 2011)

Here is a quick list of some countries running external surpluses. 

This means that these countries earn more income than they spend, _even though their Govts may borrow_. All data in USD bn.

Austria = 11
Belgium = 7
Germany = 194
NL = 66

DK = 22
Norway = 54
Sweden = 35

Switz = 86

Russia = 86

Japan = 150

China = 259

*All these countries are net savers, and so are accumulating net foreign assets.*


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## Chris (5 Dec 2011)

horusd said:


> Running a balanced budget wouldn't work. As Sunny says countries need to borrow and not all borrowing is bad, in fact it can be wealth-generating. The problem isn't borrowing per se, it's _imprudent _borrowing. As a rule of thumb,borrowing to fund day to day spending is bad.
> 
> But we also have a ideological, social and economic problem: we are addicted to growth, and economic growth has become the objective and measure of well-being.  The inherent premise is that the more wealth the better the country, the happier the people. This is patently false, or at least substantially false.  As the philosopher Khalil Gibran (_The Prophet_) says "Beware of comfort that enters your house as a guest and becomes the master."



I don't think there is any precedence for that assumption you are making. I was listening to a German radio station over the weekend and a commentator said that Australia was going to be debt free by 2020.
Governments are inherently incapable of making profitable investments as there simply is not the same incentive structure as with private companies. Governments cannot make economies wealthier.
Forcing politicians to pay for their promises out of taxation keeps them on the ground and a little bit more honest.



Purple said:


> Two points;
> We did pay back much of our debt during the bubble years but spending was/is so out of control that our debt exploded when the bubble burst.



I don't think this is right. If I am not mistaken the level of total debt stayed at about €38bn, what did go down was the debt/gdp level, but actual reduction of debt never happened.


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## Firefly (6 Dec 2011)

Chris said:


> jCountries would be un much better shape if they were constitutionally forced to balance the budget, and politicians were forbidden to borrow even one cent from anyone.



Hi Chris,

I would be very interested in hearing your views regarding the moves that are supposedly underway currently by France and Germany to limit the budget deficits of member states or take those countries to court in return for "saving the euro". 

Whilst this is not exactly the same as what you are calling for above (where no borrowing should be permitted) do you think it's at least a move in the right direction? 

At first I thought it was, but perhaps this would restrict competition between member states themselves and give a clear advantage (at least in the short term) to the "good" countries? Also, is this just interference in the market at the end of the day?


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## horusd (6 Dec 2011)

Hi Chris, my premise is that borrowing prudently for investment is rational and defensible. The shannon hydro project or good infrastructure are prudent investments in this sense which may require borrowing and facilitate wealth generation.  Education is another one. 

The issue you raise around governments being unwise is somewhat valid., but one cannot assume that private companies, regardless of the incentives, are necessarily better, or more saavy o that public investment is always poor, Norway's investments on behalf of it populace being a case in point.


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## Chris (7 Dec 2011)

Firefly said:


> Hi Chris,
> 
> I would be very interested in hearing your views regarding the moves that are supposedly underway currently by France and Germany to limit the budget deficits of member states or take those countries to court in return for "saving the euro".
> 
> ...



Fundamentally I do not agree with the EU setting national policies top down, but that has more to do with the fact that I have become a total EU skeptic regardless of the policies being suggested.

But essentially I think this talk of new rules is purely political PR for Merkel and Sarkozy. There were rules in place before called the stability and growth pact, but every single country including Germany and France, broke the rules. Nothing will convince me that the same exceptions will not be made again.

The second issue is that given the level of debt, rules should be put in place to reduce debt, but the rules suggested are simply going to slow down the speed at which we are going over the cliff; the end result will be the same.



horusd said:


> Hi Chris, my premise is that borrowing prudently for investment is rational and defensible. The shannon hydro project or good infrastructure are prudent investments in this sense which may require borrowing and facilitate wealth generation.  Education is another one.
> 
> The issue you raise around governments being unwise is somewhat valid., but one cannot assume that private companies, regardless of the incentives, are necessarily better, or more saavy o that public investment is always poor, Norway's investments on behalf of it populace being a case in point.



The problem is though that politicians and bureaucrats are no good at making good investment decisions, if they were then they would be successful investors making millions. Paying for everything out of taxation ensures that the public is convinced that a project will be beneficial. Paying for it through borrowing simply disguises the cost of investment as it doesn't have to be paid for until some future date. This is dishonest and very opaque.

Yes Norway has made some good investments in oil, but it is impossible for them to tell if the resources were utilised most efficiently. Private investment has to always make the most efficient use it can achieve otherwise it risks losing business, this same incentive does not exist when politicians make investment decisions.

Look up two of the most disastrous "investments" made by the US government in the companies Solyndra and EnerDel. Both companies could not get loans, so the US government stepped in to fund what was termed a no-brain investment in the green energy industry. $700m have been wasted as Solyndra has declared bankruptcy and EnerDel is scaling back operations to avoid bankruptcy.
Burt Folsom has some quick commentary about this:


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## Firefly (7 Dec 2011)

Chris said:


> But essentially I think this talk of new rules is purely political PR for Merkel and Sarkozy. There were rules in place before called the stability and growth pact, but every single country including Germany and France, broke the rules. Nothing will convince me that the same exceptions will not be made again.



I tend to agree. Also, taking a country to court who breaks the new rules will (you would imagine) result in fines. Given that the country broke the rules because they needed to borrow more money in the first place how will these fines be paid?


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## zztop (9 Dec 2011)

How can we have a surplus if we are the deficit
is 20bn for the year.


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## Protocol (9 Dec 2011)

There has been a massive drop in investment exp by the private sector (households and firms), esp on houses.

So the private sector is no longer borrowing from abroad.

In fact, it is a net saver.

If it saves more than the Govt borrows, then the nation as a whole is a net saver.

That is what's happening in 2011.


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## Protocol (9 Dec 2011)

See here:

[broken link removed]

The nation was a net saver of 761m in 2010.

*However, we still have huge stock of foreign liabilities.*


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## mainasia (9 Jan 2012)

horusd said:


> Running a balanced budget wouldn't work. As Sunny says countries need to borrow and not all borrowing is bad, in fact it can be wealth-generating. The problem isn't borrowing per se, it's _imprudent _borrowing. As a rule of thumb,borrowing to fund day to day spending is bad.
> 
> But we also have a ideological, social and economic problem: we are addicted to growth, and economic growth has become the objective and measure of well-being. The inherent premise is that the more wealth the better the country, the happier the people. This is patently false, or at least substantially false. As the philosopher Khalil Gibran (_The Prophet_) says "Beware of comfort that enters your house as a guest and becomes the master."


 
Yes spot on..imprudent borrowing or poor debt management or relying on debt too much is the issue.

For instance a country could balance it's country perfectly well for 20 years, but the country could face any number of problems because it had not prepared properly for military invasion, technological change, economic change, climate change etc. Also as it would be forced to balance the budget every year large capital projects could take X number of times to finish compared to a country than can borrow that money and pay for it over it's lifetime.

In addition, inflation can make using borrowed money the cheaper option compared to cash.


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## mainasia (9 Jan 2012)

Protocol said:


> There has been a massive drop in investment exp by the private sector (households and firms), esp on houses.
> 
> So the private sector is no longer borrowing from abroad.
> 
> ...


 
Eh..by some accounts Ireland has the largest public and private debt per citizen in the WORLD.

http://cormaclucey.blogspot.com/2012/01/prospects-for-irish-residential.html

Just because 2011 was a net saving year doesn't really mean a whole lot, a bit like a drop in the ocean unless debt is written off.


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## mainasia (9 Jan 2012)

> Look up two of the most disastrous "investments" made by the US government in the companies Solyndra and EnerDel. Both companies could not get loans, so the US government stepped in to fund what was termed a no-brain investment in the green energy industry. $700m have been wasted as Solyndra has declared bankruptcy and EnerDel is scaling back operations to avoid bankruptcy.
> Burt Folsom has some quick commentary about this:


 
Well sometimes things don't work out and a large problem is the fact that the US allows importation of cheaper goods from China from companies that are funded by the state there.
The idea was good, the overall implementation bad. 

On the other side of the coin, government intervention following the credit crisis actually saved 100,000s of jobs in the auto industry and other industries in the US and almost all the money has already been paid back at a net profit to the taxpayer!

So be careful reading commentaries from the US as they usually have a political slant rather than a balance viewpoint.


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## Chris (13 Jan 2012)

mainasia said:


> Well sometimes things don't work out and a large problem is the fact that the US allows importation of cheaper goods from China from companies that are funded by the state there.
> The idea was good, the overall implementation bad.


Yes, sometimes things don't work out, but when the money you play around with is not yours then you are not as careful with it as a private investor would be. Fact is that Solyndra could not get investment from the private sector, that means that no private investor thought that the company was worth investing in. What magic insight do bureaucrats have that allows them to bet against the market?
The idea was a disaster from the start. If you can get something cheaper from elsewhere then that is a good thing, as you can put your own resources to better use. It is cheeper for my family to buy food than it would be to produce it ourselves. The logic applies when looking at a country's economy as a whole.



mainasia said:


> On the other side of the coin, government intervention following the credit crisis actually saved 100,000s of jobs in the auto industry and other industries in the US and almost all the money has already been paid back at a net profit to the taxpayer!


This is not correct. there has been absolutely no profit from all the bail outs in the US. 
GM is still majority owned by the US taxpayer, but GM as a company has not changed one bit since it was bailed out, so it is just going to go bust again, shares are already down 35% since the IPO. If the auto industry had not been bailed out then those jobs would not have disappeared. When companies go into bankruptcy they do not vanish from the earth, they are sold off whole or in parts to companies that can do a better job at managing the resources.
The bailouts of the financial industry were even worse. Yes the money directly lent to companies has been returned, but what no politician is willing to factor in is all the toxic debt that the FED bought ($1.25tr). This is held on balance sheet with the par value, not the market value, as there is essentially no market value for them, i.e. they are worth 0.



mainasia said:


> So be careful reading commentaries from the US as they usually have a political slant rather than a balance viewpoint.


The commentary I pointed to is based on basic economics, something that is never correctly represented in commentary about the bailouts. Your argumentation is that if the government had not bailed out the auto industry then thousands of jobs would have been lost, i.e. absent the government "investment" these jobs would have gone. But this completely ignores the fact that government has no money of its own, it takes it out of the productive economy. So that means that the money "invested" in the auto industry is money that was not invested by the private sector, so there is no net gain!


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