Things are looking up. Led by rising house prices, the US recovery is likely to accelerate this year. Budget deficit projections have declined, too. And although the European economy is stagnant, there is some evidence that stimulative policies are gaining traction in Japan. So this is an opportune moment to reconsider the principles that should guide fiscal policy.

A prudent government must balance spending and revenue collection in a way that assures the sustainability of its debts. To do otherwise would lead to instability and slow growth – and court default and catastrophe. Deficit financing of government activity is not a sustainable alternative to increasing revenues or to cutting public spending. It is only a means of deferring payment. Just as a household or business cannot indefinitely increase its debt relative to its income without becoming insolvent, the same holds for a government. There is no permanent option of public spending without raising commensurate revenue.

So it follows that there is, in normal times, no advantage to running large deficits. Public borrowing does not reduce ultimate tax burdens, and it tends to crowd-out borrowing by the private sector, which could otherwise finance growth. It encourages international borrowing, which means an excess of imports over exports. The private sector may also be discouraged from future spending if it fears that tax rises to pay for the deficit are on the horizon. That is why it is usually the job of the US Federal Reserve to manage demand in the economy by adjusting base interest rates, rather than the job of those in charge of deficit financing.