We were told that there is no great change in government fiscal policy in the 2020 Budget. So this budget — as was last year’s — was as boring as we were all thinking it was going to be.
The attempts to both reduce the deficit and shrink the size of government continues, but some people are screaming that their pet projects will die as what is spent goes to other peoples’ desires — something that a democracy does when an election changes national priorities.
With the upcoming state budget — to correct the one that PH government kidded everyone with before and after the general election — it might be time to answer the question of whether fiscal discipline i.e. deficits really matter?
The truth is there are two entirely different arguments going on here. There’s an economic one and that’s conducted to one set of logical rules. Then there’s the political argument, which is being run on entirely different lines.
Each borrowing or spending, whatever part of the economic story, seems suitable for their political purpose at the time. And equally ignoring the bits of the economic story that seem inconvenient to their preferred arguments at any one time.
In that strict economic sense: Government spends more than it collects in taxes. This is about as worrisome as my borrowing a RM100 until payday. Because that’s what is being done, some borrowing is being done from future government revenue to spend now.
So PH politicians tramping around the country shouting that we’ve got to close the deficit isn’t quite without actually doing so.
What’s really at the core of their argument is politics. When you have no choice and you have to do something quickly, in most cases it is actually much easier to raise taxes, because it has an immediate effect on the budget.
Simple, just ask people: Go to the cash machine of the taxpayer, and you get money out of them. Compare this to spending cut: Figure out what and how to cut it. There are people saying, “Well, these are costs but they are necessary because spending cut is unavoidable.”
To minimise social cost takes a while and politically devastating sometimes. As a result some draw the conclusion and say, “Oh, look, spending cut is terrible. It is causing hardship. It’s a disaster. Look what’s happening.”
When the time is not there, you just raise taxes. So, the time pressure leads you to make the wrong choices about which kind of fiscal policy to adopt.
And that’s really what the fight is about here in politics. Not whether deficits should exist or what the correct level of the national debt should be.
But what should be the level of public spending as a proportion of the economy? Those who think spending should be higher are arguing that we should run a deficit to maintain those essential public services.
Those who think the government should be smaller are using the excuse of the deficit to curb spending on such public services. And if that’s all it were then obviously the small government people like myself would be the evil b*%#@*ds here.
If you cut government spending today, and people think that this cut is permanent, they will think, “The future taxes will be lower.”
So, if I expect the taxes in the future to be lower, then I can consume more today.
If you have an investor or entrepreneur and you see government spending going down and you expect your taxes to go down in
the future, and then you invest and plan for the future, considering that investment takes a while to materialise, the future matters a lot. So you may invest more because you expect taxes to go down in the future.
But if I see a government that is in a crisis, introducing new taxes desperately and then introducing another tax in the future because it cannot keep up with spending, then I do get worried, we all do right?
The conversations about fiscal discipline that we are having and the debate that is going on mostly has to do with the short-term impact of its policy. But I do believe that nobody would argue that you can run a budget deficit and the debt growing ad infinitum.
Most people would agree that sooner or later you have to bring deficit and debt under control. The question is what are the costs of doing that in the short run?
As such, of course, that question is entirely up to you.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the New Sarawak Tribune.
