Tag Archives: austerity

F&L Blog – Balanced Budgets, Broken Democracies

Balanced budgets, Broken Democracies: the urgent need to democratize money

Colleen Schneider

25.09.2025

Colleen Schneider is a PhD researcher at the Vienna University of Economics and Business in the Institute for Ecological Economics. Her work focuses on the political economy of monetary and fiscal policy in a social-ecological transition. In this piece she explores how ideas about money greatly shape states’ capacity for governance, explaining how the neoliberal ideology of “balanced budgets” has been used consistently and across party lines to justify austerity. As Polanyi saw governments’ adherence to the Gold Standard during the 1930s as enabling the rise of fascism, today’s attachment to arbitrary fiscal rules risks emboldening the far-right while worsening social and ecological crises. To counter this, Schneider calls for a “deficit owl” approach to budgeting focused on the effects of fiscal spending, supported by a politicization and democratization of money.

“The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity. Money will cease to be master and will then become servant of humanity.”
Abraham Lincoln, 1985
“Well, we’re out of money now.”
Barak Obama, 2009

How ideas about money shape the capacity to govern ​

For the last 5,000 years money has served as a tool of governance. Through the Middle Ages Monarchs regularly reminted coins to increase the money supply, often to fund war. This was possible because the value of coinage was set by political decree and reinforced by trust in the governing authority. Today, we operate in a fiat money system, meaning that money is created through the spending of currency-issuing governments. Governments’ ability to create money is limited by ideas about the desirability of fiscal spending and the role of government debt.

Ideas about money shape the potential and structure of governance. The idea of “balanced budgets” has delimited the political imaginary of the last several decades. The shift to understanding balanced budgets as a good in-and-of themselves, and to the institutionalization of this idea, is a core tenet of the neoliberal era. It has been used, consistently and across party lines, to justify austerity. This includes cuts to social welfare programs as well as spending cuts on necessary public infrastructure, health, and education.  

To illustrate the importance of these ideas and how they shape the capacity for governance, we can define three distinct positions. The first two are orthodox positions of “deficit hawks” and “deficit doves.” Hawks insist government deficits are always problematic. Their thinking goes that when governments spend more than they receive in taxes, they “crowd out” private sector spending, ultimately leading to lower growth and risking default. In contrast, doves acknowledge running government deficits can be useful and necessary in the short term, such as during recession. Like hawks, they hold with the position that balanced budgets should be prioritized in the longer term. Both hawks and doves present this constraint not as a political rule, but as economic law.

The third position is that of “deficit owls.” Owls see the constraints on spending by sovereign currency-issuing governments as access to real resources, their ability to maintain price stability, and political will. Owls place the focus on the results of fiscal spending. For governments (or supra-national regions, like the Eurozone) that issue their own currency, hard limits come into play if there is a need to access foreign currency for, say, import purchases or paying foreign-denominated debts. Utilizing domestic resources, however, is constrained by the availability of those resources and the effects on the macroeconomy—namely, inflation. Owls point out that public sector deficits are nothing more than private sector surpluses. Running public surpluses, thereby driving the private sector to take on more debt, has consistently preceded recessions.   

In short, politically imposed limits on debt and deficits are the result of certain ideas about money, and of political decisions taken in specific historical and ideological contexts. In our present case, the hegemonic status of neoliberal ideology has provided the container for institutionalizing fiscal limits.

The neoliberal de-democratization of the monetary system stripped money as a tool of governance

The post-WWII Keynesian era of fiscal dominance relied upon democratic coordination for macroeconomic stability. In contrast, the 1980s were marked by a distinct shift in how the monetary system was understood and operationalized as a governance tool. Under neoliberalism, politically-embedded management of the monetary system was replaced with technocratic management and a reverential deference to bond markets. This construction of monetary scarcity can be understood through the apparent “naturalization” and “depoliticization” of money that is central to the neoliberal project. This logic found academic justification in the neoclassical treatment of money as a neutral veil over market exchange.

This naturalization of money makes the management of the monetary system a matter of technocratic efficiency best left to economists at “apolitical” and “independent” central banks. Through the shift in central banking and the deference of elected governments to the need for balanced budgets, money as a mode of governance was effectively removed from the democratic political sphere while being simultaneously stripped of morality and subjectivity. Depoliticization went hand-in-hand with de-democratization. 

Balanced budgets paved the way for austerity in the United States and Europe

Following the rhetoric of American Presidents vis-a-vis the fiscal situation of the United States provides an enlightening perspective on the shift toward deference of balanced budgets and its effects. While Lincoln, and those that came after him for the next century, discussed the fiscal budget in reference to its effects in the economy – such as employment and social provision – the 1970s mark a break from this functional understanding of monetary governance.  

In the 1980s Ronald Reagan relied heavily on the rhetorical trope of balanced budgets to impose austerity, pledging to “discipline the federal Government to live within its means”. He signed deficit reduction into law while lowering taxes and cutting spending on housing, education, and agriculture (before going on to enact massive increases in military spending in his second term). George Bush Senior went so far as to attempt to write balanced budgets into the constitution. James Buchanan supported this effort, arguing that it would be an effective and permanent barrier against democratic demands for social spending. This was democracy, insulated from too much democracy—a marker of neoliberal politics.

Buchanan’s effort was not successful, and, in place of constitutional amendment, Bush Senior institutionalized a pay-as-you-go (PAYGO) spending rule, intended to limit fiscal capacity and “solve the problem of budget deficits.”  Clinton, too, oversaw vast cuts and, in some cases, complete withdrawal of social welfare programs in the name of deficit reduction. G.W. Bush then used the“left over” money from Clinton’s budget surplus then to justify tax cuts. Obama focused on the need for fiscal discipline and restored the PAYGO rule.

Both the Democratic and Republican parties have consistently taken the positions of fiscal doves or hawks, treating public goods as liabilities and economic growth as the highest good. The consistent result has been the gutting of social protections.  

The fiscal limits of the European Union—enshrined in the Maastricht Criteria and enacted through the Stability and Growth Pact (SGP)—are emblematic of the de-democratization of monetary governance. Several European states have also enshrined balanced budgets into their constitutions. Switzerland amended their constitution in 2001, and Germany constitutionalized the debt brake in 2009, among others. These limits are not based on any sound empirical relationship between debt, deficits, and growth, while institutionally embedding an incapacity to effectively deal with unemployment, the climate crisis, and myriad other crises.

The COVID pandemic revealed the fragile state of public services in the EU after years of austerity, and the activation of the SGP’s escape clause during the pandemic made clear the extent to which the debt and deficit rules inhibit effective social (and ecological) spending. In 2024 the SGP was revised and reinstated by the European Council with only minor changes, and now imposes an estimated €100 billion in cuts for EU governments, which will hit low-income households hardest.  

From neoliberal balanced budgets to far-right extremism

Just as Karl Polanyi referred to faith in the gold standard as an ideology shared by whole nations in the 19th century, balanced budgets play this role in the neoliberal era. The result is governments that have been heavily constrained in their capacity to address social ills, driving skyrocketing inequality, and escalating ecological crises. A line can be drawn from the disenfranchisement driven by years of neoliberal austerity to recent fascistic counter-movements. Consider the rise of the Golden Dawn party in the midst of the Greek government debt crisis driven by the Troika. Or the rise of Alt-Right groups in the United States in the last two decades.

In The Great Transformation Polanyi blamed the “stubbornness” of economic liberals in prioritizing the maintenance of the gold standard system in the late 19th and early 20th century for the “decisive weakening of the democratic forces that might otherwise have averted the fascist catastrophe”. Polanyi contended that the United States, in leaving the Gold Standard in 1933, showed themselves to be “masters not servants of the currency” and utilized their newfound fiscal capacity to fund the New Deal program. Two converging factors enabled this to happen: a claiming of the fiscal capacity of the government, and a government that was held accountable to the needs of the working class. The New Deal demonstrated how democratic politics and social protection can go hand-in-hand to mitigate the effects of increasing marketization and to forestall shifts toward fascism. Politicization and democratization of the monetary system are essential in this.

With this in mind, we can question where cracks in the ideology of balanced budgets exist today, and toward what ends they are directed.

Deficits for war, not peace?

For decades now neoliberal dominance has delimited the political imaginary. Attempts to question the validity of fiscal rules and to explore alternatives have been dismissed as “unrealistic” or “irresponsible.”  But government responses to the financial crisis of 2007-08 and to the pandemic created cracks in the veneer of “there is no alternative”. Recently, the European Council has granted the activation of national escape clauses specifically for defense spending and, as of July 2025, 15 nations have signed on to this option. This means, simply, that spending on defense is not counted toward debt and deficit limits. A political choice made manifest, while holding on to the rhetorical insistence that the limits are necessary. Following the pause on the SGP during the pandemic, a coalition of EU nations called for social and ecological spending to be permanently exempted from debt and deficit limits, but a stronger coalition pushing “fiscal responsibility” effectively opposed this.  

Donald Trump has stated that he wants to scrap the U.S. debt limit entirely. While he has not managed to do this, the One Big Beautiful Bill Act passed in July 2025 raises the debt ceiling by $5 trillion, and will add an estimated $3.4 trillion to the national debt over the next decade. Most of the economic benefits will go to the rich. The middle class will see little, if any benefit, and poorer households will lose. In doing so, Trump can frame himself as breaking with the (much maligned) status quo, while simultaneously serving corporatist and wealthy financial interests. This is money as a tool of plutocratic governance.  

To confront our crises we must politicize and democratize money

To effectively address the multiple social and ecological crisis of the present day, we must make explicit the political nature of money, and thus the capacity for money as a mode of governance. However—as Polanyi witnessed in Europe in the 1930s and the US is witnessing today—a politicized monetary system can serve as a tool of fascism just as easily as one of socialism. Given this, it is essential that politicization takes place alongside strengthening and expanding democracy, including monetary and economic forms of democracy.

In focusing on the effects of public spending, not arbitrary budget rules, the approach of deficit owls creates a coherent alternative to neoliberal rhetoric, a counter to austerity logic, and offers the capacity to build out robust forms of social protection and effective responses to ecological crises.

Colleen Schneider is a PhD researcher at the Vienna University of Economics and Business in the Institute for Ecological Economics.

Related Posts

F&L Blog Launch Announcement

Blog Launch: Fascism and Liberalism - Yesterday and Today

Solveig Degen, Maie Klingenberg & Andreas Novy

31.07.2025

One hundred years ago, Austro-Hungarian economist Karl Polanyi witnessed the collapse of liberal democracies and the rise of fascism in Europe – a development which he famously analyzed in The Great Transformation. Following the onset of the Great Depression in 1929, economic liberalism was on the defensive. The widespread belief that laissez-faire capitalism and the prevailing property relations were without alternative had crumbled after the experience of far-reaching state interventions during World War I. Moreover, the assertiveness of a revolutionary workers’ movement, including its vision of democratic control over production via workers’ councils and the tools of economic planning left the propertied classes in distress. However, not socialist but fascist ideas eventually gained the upper hand in the 1930s in different parts of Europe. Commenting on these developments, Karl Polanyi remarked in 1944[i]:  

 “Planning and control are being attacked as a denial of freedom […]. Yet the victory of fascism was made practically unavoidable by the liberals’ obstruction of any reform involving planning, regulation, or control” – Karl Polanyi 1944, p. 265 

In her acclaimed 2022 book The Capital Order[ii], Clara Mattei shows how austerity served as a key tool for enabling this broader regime change. In the 1920s, austerity was imposed by democratic means in the UK, Germany, and Austria, creating socioeconomic conditions that ten years later were conducive to the rise of fascism. In Italy, however, it was only under fascist rule from 1922 onwards that the austerity agenda of economic liberalism could be implemented. These historical examples reveal a troubling pattern: A hundred years ago, sacrificing democracy and civic liberties to uphold economic orthodoxy seemed justifiable to important parts of the liberal elites. Today, similar anti-democratic dynamics can be observed, which raises urgent questions: Will today’s liberal elites once again forsake political equality and individual freedoms? And will they, once again, open the door to authoritarian, reactionary, and anti-democratic far-right movements? 

Historical analyses show that prominent thinkers of economic liberalism such as John Stuart Mill (1806–1873), Friedrich Hayek (1899–1992), and James M. Buchanan (1919–2013) shared a deep-seated mistrust of decisions made by societal majorities. Many of their beliefs were fundamentally anti-egalitarian, including the convictions that mass democracy endangers freedom and that state intervention is incompatible with market economies 
Today, the tensions between economic liberalism and democracy are becoming increasingly visible again: neoliberal policies driving privatization and marketization have undermined the capacity of states to address urgent societal challenges, such as widening social inequalities and accelerating climate breakdown. Donald Trump’s administration of neoliberals, billionaires, racists and sexists is taking these anti-public strategies even further, providing a prime example of how economic liberalism and fascism are entangled in protecting societal hierarchies, capital interests, and neo-colonial structures. Despite evident ideological contradictions, unlikely alliances between nationalist figures such as Trump and anarcho-capitalists such as Javier Milei and Peter Thiel appear to flourish.
 
In Europe, we see striking parallels: In early 2025, a potential coalition between the Austrian far-right FPÖ, and the conservative ÖVP was endorsed by the representative of the Federation of Austrian Industries, despite the open challenge of the FPÖ “people’s chancellor” Herbert Kickl of key political and civic liberties, social rights founded in the institutions of liberal democracy, and the welfare state. Whereas the negotiations failed at the last second, an austerity discourse continues to dominate public debate in Austria. In Italy, the ministry of education under post-fascist Giorgia Meloni wants to turn highschoolers’ history curriculum into an appraisal of Western civilization including apologetic and distorted representations of World War II and European imperialism. A few weeks ago, the proposal to grant Italian citizenship to diligent pupils demonstrated chillingly how closely the neoliberal myth of meritocracy and eugenics lie together. All the while, the complete annihilation of civilian life in Gaza is tolerated and, in some cases, actively supported by liberal democracies such as Germany, which continues to authorize arms deliveries to Israel. 
 

With this new blog, we, the International Karl Polanyi Society (IKPS) aim to further investigate and improve our understanding of the relationship between fascism and economic liberalism, both historically and in the present day. Publishing weekly pieces on this topic from key scholars in the field, we aim to contribute to the broader discussion on the rise of contemporary reactionary far-right movements. The blog will provide a platform for discussing central questions such as: What is the connection between austerity and fascism? How do the intellectual foundations of (neo-)liberalism and fascism converge, and what are tensions and contradictions? What has been the role of neoliberal thinkers in furthering far right agendas? And, in the words of Karl Polanyi, is the rise of current far-right movements again “made practically unavoidable by the liberals’ obstruction of any reform involving planning, regulation, or control”? 

 ———————————–

i Polanyi, K. (2001). The great transformation: The political and economic origins of our timeBeacon Press. (Original work published 1944) 

ii Mattei, C. E. (2022). The capital order: How economists invented austerity and paved the way to fascismUniversity of Chicago Press. 

Andreas Novy

Andreas Novy is is associate professor and head of the ISSET Institute at WU Vienna and president of the International Karl Polanyi Society (IKPS).

Maie Klingenberg is a research assistant at the ISSET Institute at WU Vienna working on the democratization and deprivatization of provisioning systems.

Solveig Degen is a PhD student at the Centre for Social Critique in Berlin working on the socialisation of public services.