Modern monetary theory: Spending does not have to be "paid for" with tax increases, now or in the future

Advocates of Modern Monetary Theory (MMT) argue that deficits do not matter because the central banks can print money. Others argue that with ever expanding deficits, spending in excess of tax revenues is simply unsustainable and that high government debt slows economic growth. They argue that spending must be brought into line with revenues through various forms of fiscal consolidation involving reduced spending, tax cuts, and deregulation. Long-term misallocations will be difficult to correct. Reinhart and Rogoff (2020) and others have a similar warning, “Seldom do countries simply ‘grow’ their way out of deep debt burdens.” Rather, Reinhart and Rogoff found that countries that have accumulated large gross government debts as a percentage of gross domestic product (GDP) must take comprehensive action to reduce their debt levels if higher rates of growth are to occur. A growing body of empirical studies led by Harvard economist, Alberto Alesina, show that fiscal consolidations which are heavily weighted on government spending reductions are far more likely to be successful in meeting these objectives than fiscal consolidations in which revenue increases play a significant role. Alesina and others found that fiscal consolidations based predominately or exclusively on spending reductions lead to economic expansion and growth. Specifically, they found that for a government with a large, persistent budget deficit and a high level of government debt, reducing government spending as a percentage of GDP boosts the expected after-tax rate of return on investment which serves as a major stimulant to economic growth. This paper focuses on fiscal consolidations in Canada (1993-2006), Sweden (1994-2000), New Zealand (1986-1996), and as an alternative to MMT.