Progressive Money

Economics in the Real World · scenario 2 of 10 · about 12 min

“The government has to balance its budget like a household.”

Why people make this argument

It feels like common sense. Most of us have lived within a budget, and know that spending more than you earn year after year ends badly. Politicians of all parties use the image because voters understand it, and it carries a moral message about responsibility and not leaving bills for others.

The strongest version does not say the government literally is a household. It says deficits have to be justified: borrowing adds to debt and interest, spending beyond what the economy can produce causes inflation, and governments that stop counting the cost make expensive mistakes. The household image is a simple way of saying 'governments face limits too'.

Ideas you'll need

What isn't in dispute

A government deficit equals the non-government sector's surplus, to the dollar: that is accounting. The Commonwealth issues the Australian dollar and borrows in it; a household, a business or the NSW Government uses a currency it does not issue.

The May 2026 Budget forecast an underlying cash deficit of $31.5 billion, 1.0 per cent of GDP, for 2026–27, and gross debt of $1,051 billion, 34.0 per cent of GDP, at 30 June 2027. The government's stated strategy is to return the budget to balance 'in a measured way, over time' and to reduce gross debt as a share of the economy.

How mainstream economists would analyse it

Most mainstream economists also reject the literal household analogy. A household's working life ends; a government's does not, so it never has to repay all its debt, only keep it manageable relative to the size of the economy. Deficits in recessions are standard advice: tax receipts fall and welfare payments rise automatically, cushioning the downturn, and forcing balance then would deepen it. Olivier Blanchard has argued that when interest rates are below growth rates, debt may cost less than usually assumed.

But mainstream economists keep a budget constraint over time. Interest has to be paid, investors' willingness to hold bonds depends on confidence in the budget, and persistent deficits in a fully employed economy add to inflation. Many therefore favour balance or surplus on average over the economic cycle, not every year.

How MMT economists would analyse it

MMT economists say the analogy gets the most important fact backwards. A household is a currency user and must earn or borrow before it spends; the Commonwealth issues the currency, so its deficit is not a sign of financial trouble.

Because a deficit equals the non-government surplus, they argue, a government that balances its budget while the country runs a current account deficit leaves the private sector as a whole spending more than its income and going further into debt. On this view the right budget balance is whatever keeps the economy at full employment without inflation: usually a deficit for Australia, occasionally a surplus. Stephanie Kelton argues deficits should be judged by what they achieve and who receives the surplus. Bill Mitchell adds that the limit on spending is what is available to buy.

Your turn

Your turn: Is the household analogy useful, misleading or both? Explain where it holds and where it breaks down for the Australian Government.

Show a model response and the rubric

The analogy is partly useful and partly misleading. It is useful in one way: governments face real limits, and spending beyond what the economy can produce leads to inflation, just as a household cannot buy more than exists. It is misleading about money. The Commonwealth issues the Australian dollar and borrows in it, so it cannot run out of money the way a household or the NSW Government can. And its deficit is, by accounting, a surplus for households, businesses and the rest of the world.

Mainstream and MMT economists both reject balancing every year. Mainstream economists still see a budget constraint over time, with interest costs and investor confidence mattering, and many prefer balance over the cycle. MMT economists see inflation and real resources as the limit and would let the balance be whatever full employment requires.

My conclusion depends on how close the economy is to capacity and how much interest costs limit future choices. Inflation rising alongside deficits would point to the limits; persistent unemployment under surpluses would point to the costs of balancing too soon.

A strong response

  • Distinguishes a currency issuer (the Commonwealth) from currency users (households, businesses, state governments)
  • Uses the sectoral balances identity correctly, as accounting rather than a policy prescription
  • Notes that mainstream economists also reject annual balance, and states their remaining concerns accurately
  • Identifies inflation and real resources as limits that do apply
  • Says what evidence or assumptions would change the conclusion

There is no single right answer. Reach your own conclusion, and be ready to say what evidence would change it.

Limitations and counterarguments

The MMT critique is strong on money but has limits. It relies on judging when the economy is near capacity, which is hard in real time, and on governments being willing to raise taxes or cut spending when inflation rises, which is politically difficult. MMT's simplified model treats government and central bank as one, which does not describe Australia's institutions: the RBA sets interest rates independently, with its own inflation mandate.

The mainstream view has its own risks. Fiscal targets can become a household analogy in disguise, driving cuts in a downturn that weaken the economy. And the analogy does apply to state and local governments, which use but do not issue the dollar.

Revisit Stephanie Kelton: The big myth of government deficits | TED · How To Create A Currency From Scratch (Long Version) · Fiscal Policy · Bill Mitchell: Demystifying Modern Monetary Theory

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