As election time draws near in the UK , and the US presidential election campaigns start to get underway across the Atlantic, we’ll no doubt hear a lot about this topic shortly, if we haven’t already. Apologies if you’ve heard this all before but the political and economic mainstream still don’t grasp it. Political parties will accuse their opponents of making “unfunded promises”, and of having “black holes” in their budgets etc . Nations’ finances will be likened to a household.
Except that Sovereign Governments, like the USA and UK are issuers of currency. They aren’t at all like a household. If a household has a deficit of say £10k pa then, generally speaking, spending cuts of £5k coupled with an extra £5k of earnings will fix the problem. How many times do we see see the same logic applied to countries too? It never works. It can’t work. Governments afterwards wonder why. It isn’t difficult to understand:
Money coming into the Private Domestic Sector , which is essentially what we all think of as “the economy” can only be from two sources. Government spending directly into it (Gsp) , and payments from overseas for exported goods and services. How can anyone possibly think that reducing Gsp isn’t going to affect Taxes paid? Every £ or $ collected in tax originally comes from Govt spending.
The ability of the economy to deliver taxes to the government has to be directly related to its income. Reducing its income will make us all poorer and reduce our ability to deliver those taxes. Spending cuts won’t do anything like as much towards reducing that deficit as is usually supposed.
How much simpler could it be?
And yet if the “balanced budget” cretins get their way what will happen? The government will makes cuts, tax revenue will fall and the deficit will end up not much different to what it was previously. The cretins will then argue they didn’t make enough cuts and that they’ll need to make more on the second round. And so it will go on, with increased levels of unemployment and business failures at every stage.
We just can’t let this happen. It’s madness. Instead of forcing the budget to “balance”, we should should look at balancing all the money flows to maximise our economic potential.