In times of economic crisis, governments face a crucial decision: should they tighten their belts through austerity, or invest in recovery using tools like sovereign money? While austerity measures such as cutting public spending have often been the default response, history, and economic theory show that they frequently do more harm than good. In contrast, sovereign money policies offer a more effective and sustainable path to economic stability and growth.
The Flawed Logic of Austerity
Austerity is based on the idea that government budgets should be managed like household budgets: if you’re in debt, you cut spending. But countries aren’t households. When a government cuts spending during a recession, it reduces demand in an already struggling economy. That leads to:
- Higher unemployment as public sector workers are laid off or public contracts are cancelled.
- Lower private spending because people fear job losses and reduced incomes.
- Slower growth or even deeper recession, making it harder for the government to collect taxes and repay debt.
The eurozone crisis of the 2010s is a prime example. Countries like Greece, Spain, and Portugal were pressured into severe austerity programmes. The result? Shrinking economies, mass unemployment, and worsening debt ratios. Austerity didn’t solve their problems—it prolonged and deepened them.
The Promise of Sovereign Money
Sovereign money offers a powerful alternative. It refers to money created directly by a sovereign nation’s central bank—money that doesn’t come from borrowing or taxation but from the government’s unique ability to issue currency.
When deployed responsibly, sovereign money can be used to:
- Fund infrastructure, education, and healthcare, creating jobs and long-term productivity.
- Stabilise demand during downturns by putting money into the hands of consumers.
- Reduce dependence on debt since the government isn’t borrowing the money it creates.
Japan, for example, has run large deficits and relied heavily on central bank financing (often labelled “Modern Monetary Theory” in policy discussions) without sparking runaway inflation. The result has been decades of low unemployment and relative economic stability, even with high public debt.
Inflation Fears Are Overblown
Critics often warn that printing money leads to hyperinflation. But that only happens when too much money chases too few goods—typically in economies with collapsed production, like Zimbabwe or Venezuela. In developed economies with unused capacity and deflationary pressure, sovereign money can boost demand without inflation.
The COVID-19 pandemic provided a real-world test: many governments increased spending dramatically and financed it through central banks. Rather than causing economic collapse, this approach helped prevent depression-level downturns.
A Smarter Path Forward
Austerity is a blunt, outdated instrument that sacrifices growth and stability on the altar of short-term fiscal discipline. Sovereign money, when used wisely, allows governments to support the economy without sinking into deeper debt or hardship. It’s time to shift the narrative and recognise that New Zealand’s government has more tools at its disposal than just cuts and taxes.
In a world where economic well-being depends on confidence, investment, and full employment, sovereign money isn’t just a policy option—it’s a necessity.
– Brian MacCloy, CoOperativeNZ
