By Frank Shostak, Mises Wire | May 04, 2026
Projects that the government undertakes are likely to be of a questionable nature. The fact that the private sector did not undertake these projects indicates that these projects were not demanded or prioritized by consumers. For example, if the government decides to build a pyramid, it is evident that most people regard this as a low or non-existent priority.
To complete this project, goods and labor must be purchased away from the private productive economy. The government is not a wealth-producer since it has to impose taxes on wealth-generators in order to fund the building of a pyramid. The more pyramid-building that the government undertakes, the more wealth is taken away from wealth-generators. It follows that the level of tax is directly determined by the size of government activities. All that governments do require resources to be extracted from the private economy.
In a money economy, the government will tax and transfer the received money to various individuals who are employed, directly or indirectly, by the government. The government employees can now exchange this money for various goods and services and engage in the consumption of wealth without making any contribution to the wealth formation.
Government uses various methods to divert wealth from wealth-producers toward its activities. These methods include direct and indirect taxes and levies, monetary inflation as a result of government borrowing from the central bank, and borrowing from the private sector. The method of diverting wealth is of secondary importance. What matters here is that wealth is taken from wealth-producers. The more that is taken, the higher the effective tax imposed on the wealth-generating private sector will be.
When government borrows from the private sector, it cannot repay the borrowed wealth. Only wealth-producers, who are borrowing from each other, are in a position to repay from their future production of wealth. All that the government can do is to pay back the borrowed wealth by means of newly-created money, or through new taxes, or through new debt, thereby further impoverishing wealth-producers. It amounts to a process whereby the government borrows from you in order to repay you plus taxes, debt, and inflation.
Similarly, when government borrows from the central bank, it effectively causes the central bank to hand the government newly-generated money, which is employed to divert wealth from the private sector.
With respect to the government borrowing from overseas, the burden of servicing the foreign debt will fall on the private sector given that the government is not a wealth-producer.
What then is a budget surplus? It means that the government’s intake of money exceeds its spending of money. The emergence of a surplus produces the same effect as any tight monetary policy would. Ludwig von Mises wrote,
Now, restriction of government expenditure may be certainly a good thing. But it does not provide the funds a government needs for a later expansion of its expenditure. An individual may conduct his affairs in this way. He may accumulate savings when his income is high and spend them later when his income drops. But it is different with a nation or all nations together. The treasury may hoard a part of the lavish revenue from taxes, which flows into the public exchequer as a result of the boom. As far and as long as it withholds these funds from circulation, its policy is really deflationary and contra-cyclical and may to this extent weaken the boom created by credit expansion. But when these funds are spent again, they alter the money relation and create a cash-induced tendency toward a drop in the monetary unit’s purchasing power. By no means can these funds provide the capital goods required for the execution of the shelved public works.
Contrary to the widely-held view, the budget surplus does not automatically make room for lower taxes. Taxes cannot effectively be lowered until government outlays are curtailed. Only a cut in government spending will result in an effective tax cut. All else remaining equal, a cut in the tax rate while government outlays continue to increase will lead the government to impose greater burdens on wealth-producers through higher borrowings, higher levies, and higher indirect taxes, and through monetary inflation. The way to make tax cuts effective is to back them with government spending cuts.
Lower government spending implies that wealth-generators will now have a larger portion of the pool of wealth at their disposal. If, however, government outlays continue to increase, notwithstanding budget surpluses, no effective tax reduction is possible; on the contrary, the share of the pool of wealth at the disposal of wealth-producers will diminish all other things being equal.
For example, if government spending is $3 trillion and government revenue is $2 trillion, then the government will have a deficit of $1 trillion. Since government outlays have to be funded this means that the government would have to secure some other sources of funding such as borrowing, inflation, or new forms of taxation. The government will employ all sorts of means to obtain resources from wealth-generators to support its activities.
What matters here is that government outlays are $3 trillion, not that the deficit is $1 trillion. For instance, if government revenue were $3 trillion then we would have a balanced budget. But would this alter the fact that the government still takes the $3 trillion of resources from wealth-generators?
Some commentators are likely to argue that the private sector cannot be trusted to build up and enhance the nation’s infrastructure. For instance, the US urgently requires the building and upgrading of bridges and roads. Even if this is the case, can Americans afford the improvement of the infrastructure? The arbiter here should be the free market where individuals, by buying or abstaining from buying, decide on the type of infrastructure that will emerge.
If private savings, wealth, and social time preference do not prioritize specific infrastructure at a specific time, time may be needed to accumulate wealth to be able to secure better infrastructure. The build-up of the pool of wealth cannot be made faster by raising government spending. On the contrary, an increase in government spending will weaken the private economy.
While the government can force various non-market-chosen projects, the government, however, cannot make these projects viable. As time goes by, the burden that these projects impose on the economy through higher ongoing taxation will undermine the well-being of individuals and will make these projects even more of a burden.
What about the lowering of taxes on businesses? Surely this will give a boost to capital investment and strengthen the process of wealth-formation? As long as the lowering of taxes is not matched by a reduction in government spending, this will encourage a misallocation of capital and burden the economy. Various capital projects that emerge on the back of such government policy are the equivalent of useless pyramids.
The only meaningful contribution the government can make to wealth-generation, and hence people’s living standards, is by focusing on a reduction in spending—not whether there is a budget surplus or a deficit. This means the government must remove itself from business activities and permit wealth-generators to get on with the business of wealth-generation.
Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies.
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