Excerpt from Schumacher's Public Finance - Its Relation to Full Employment (1945)

On the principles of Public Finance:

"The classical doctrine, it will be recalled, assumed that supply creates its own demand, from which it follows that there can never be more than frictional unemployment or more than sectional overproduction. Private enterprise, it was assumed, tended always to employ all available factors of production, provided that wages and prices were sufficiently flexible. It was by no means overlooked that one man's income depended on another man's outlay and that, if some people should refuse to spend a part of their income, this would automatically reduce some other people's income. But it was believed that this, in fact, could never arise: the real resources left over by the former would always and inevitably be used by some business man for the creation of additional capital equipment. 

"Today we know that this is far from inevitable. Some people may wish to save, with no one willing to use the resources left unused by them. Decisions to save are not linked by any automatic mechanism with decisions to invest; they are ruled by a different set of motives, and the rate of interest does not work as a coordinating force. 

"The logical corollary of orthodox economics is orthodox finance. If it is believed that all factors of production are normally and inevitably utilized by private business, it follows that the State can obtain the use of such factors only by preventing private business from using them. In financial terms this might mean two things: the State might use its prerogative of 'creating' money and compete with private business for the use of the available factors of production; the result would be that the prices of all factors would rise under the pressure of this additional demand;--in other words: inflation. Or the State might use its prerogative of commandeering a part of the income of the citizens by way of taxation, in which case its own expenditure--balanced by tax revenue--would no longer add to the total demand for productive factors but would simply be substituted for private expenditure. From this it follows that the first principle of 'sound' Public Finance is that the budget should be balanced."

E.F. Schumacher sums up the principles, based on the classical economic theory principle that private business automatically maintains full employment, as follows:

1. Keep the budget small.
2. Keep the budget balanced.
3. Tax consumption, i.e. mainly the poor, rather than saving, i.e. the rich.
4. If a deficit cannot be avoided, issue long-term bonds.
5. Borrow only for purposes of 'productive' investment.