1

I was reading Strong Towns by Charles L. Marohn Jr. In it, he describes how cities must have revenues that exceed expenses in order to survive. However, in his experience, most people react to the idea that cities should "make a profit" with disgust - not only that, but most of our cities don't make a profit. They're deeply in debt.

It got me thinking. Our cities need to not be in debt. But also, do they need to make a profit? What if a city, or any governmental entity for that matter, was able to implement a policy that allowed them to exactly recoup their losses for the year by taxing just enough to break even?

It seems to me that taxing no less and no more than what is needed could have significant merit. Has any government ever tried this, and were they successful?

4
  • 3
    To what accuracy do you mean "break even"? down to exact cents? How much uncertainty is in the revenue? How much uncertainty is in the expenditure?
    – Caleth
    Jul 11, 2022 at 9:07
  • And to intensify the definition problem, is it still breaking if additional tax-revenue is used to buy assets which could later be sold? What about if those assets are (say) social housing, or some similar object within the city's remit.
    – origimbo
    Jul 11, 2022 at 9:23
  • 2
    What exactly do you mean by make a profit? By breaking even do you mean they have no surplus funds to cover unexpected events?
    – Joe W
    Jul 11, 2022 at 21:19

3 Answers 3

4

Germany is trying this since 2009 with the so-called Schuldenbremse (which could be translated as "debt-brake").

It mandates that the federal states (which includes the three city-states of Berlin, Bremen and Hamburg) are not allowed to take on any more debt. Which in practice means that they strive for balanced budgets (Schwarze Null, a black zero on the balance sheet). Some federal states have extended this mandate to the communal governments, and some communal governments implemented it voluntarily. The federal government is limited to taking additional annual debt of no more than 0.35% GDP.

Was it "successful"? Germany did manage to reduce some debt between 2012 and 2020. But then the COVID-19 pandemic struck, and both states and the federal government took on additional debt to fund containment measures and bail out businesses which were unable to operate during lockdowns. And now due to the increase of Russian aggression, the federal government decided to invest 100 billion into the military. The government is using a bookkeeping trick to not make it look like taking debt (a so-called Sondervermögen), but technically it is.

1
  • The thing about the Sondervermögen is to authorize multi-year investments in one fiscal year, which is against the normal rules.
    – o.m.
    Jul 11, 2022 at 15:26
3

most of our cities don't make a profit. They're deeply in debt.

This is an apples and oranges comparison. A "profit" is generally an income statement term equal to revenues over a time period minus expenses over a time period. Debt is a balance sheet concept equal to the total amount owed to creditors without regard to how much is due in principal and interest payments each year.

Most cities in the U.S. do have debt. Most cities in the U.S. are not "deeply in debt" in the sense of having debt service obligations that place a serious strain on the ability of those cities to repay those debts and to meet their other obligations to their citizens.

Most governments in the United States below the federal level have very strict limitations on their ability to borrow funds, and typically operate on close to a balanced budget basis.

Only a handful (e.g. Weld County, Colorado) are debt free, and the policy of having a debt-free government is only desirable in the view of a non-mainstream minority.

A government targeting to pay all of its debts still needs to use devices like insurance companies which privately accumulate reserves, or have a line of credit, to manage short term disconnects between revenues and expenses, often call "reserves" or "rainy day funds" because neither revenues nor expenses are fully predictable.

Our cities need to not be in debt.

Why? Almost all governments have big long term projects that are important to their functioning and since government revenues tend to be fairly steady, not incurring debt drastically reduces the capacity of a government to make necessary long term investments.

A government that only buys what it can afford from current revenues without saving or borrowing is almost surely underinvesting in needed infrastructure.

But also, do they need to make a profit? What if a city, or any governmental entity for that matter, was able to implement a policy that allowed them to exactly recoup their losses for the year by taxing just enough to break even?

The problem is that revenues and expenses aren't that predictable (and even when they are predictable are "lumpy"), and the downside to not paying a legitimately owed debt is greater than the downside to having financial reserves in the event that revenues are low or expenses are higher than anticipated.

Keep in mind that the "profit" from excess revenue is going anyway but to pay future expenses. It is profit that inures to private individual owners of an enterprise which makes an enterprise "for profit" instead of "non-profit".

2

Has any government ever tried this, and were they successful?

Sure. Switzerland does it very successfully since 2003 already. Look at article 126 of the Federal constitution of the Swiss Confederation.

They basically adjust expenses on expected income and only aim for achieving break even on average over multiple years, but of course they also could easily adjust income to match proposed expenses. They are constitutionally limited to break even over multiple years there.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .