Balanced budget
- Thread starter marktaha
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Riain
Banned
How would fiscal stimulus occur in times of financial crisis? Would good times be used to build up a war chest for downturns?
Fuzzy Dunlop
Banned
Didn't the USA try that in the 90's under the Clinton administration but it just fell apart when they needed $$$ when new spending programs needed funding?
They govt' will just change the law so they can spend more
I'd imagine that would be the theory, but I doubt any politicians would follow it. Politicians and the public sector are the most short term focused groups I've ever dealt with.
If the rule isn't just changed then I'd expect a lot of fudges. It would be argued automatic stabilisers (like unemployment benefits) wouldn't count, local governments spending would be exempted, lots of PFI and other schemes to hide spending off the balance sheet (and hide the problem for the next government to deal with).
A 'balanced budget' rule would end up with a modern state lurching from 'feast' to 'famine' as the economic winds hit even harder than it should because it can't 'tack with the wind' and ride things out.
Let is take this pandemic for example. Predictions show that the US Federal Budget for '21 is going to be 'under' by ~17.5% even before any new spend is factored in. With the balanced budget rule, this means you'll need to cut by that number and/or raise taxes to pay for it. Modern Republicans don't accept tax rises for any reason, which means cuts. But military spend is about 50%, but that can't be cut. The #2 cost is Social Security at around 23%, but despite what right-wingers say, the bulk of this goes to senior citizens and so can't be cut. Result 'everything else' will need to be cut by 75% to make a balanced budget. That will make the UK's bone-headed Austerity look like nothing.
A 'balanced budget' strictly followed also means no surpluses. Therefore, this will require a) arbitrary emergency spending and/or b) tax rebates. As the govt is the largest single consumer in a country, having them spending in 'binge and starve' cycles would throw the rest of the economy out of whack; for the departments will run out and buy as much as they can in the 'fat' years in the hope it will tide them over the 'thin' years. Even worse, such a rule would mean the current national debt could not be reduced unless a disclaimer is put in to allow it.
As pointed out it means the Govt can't respond to emergencies, like a natural disaster. Would Washington delay assistance for say, Hurricane Katrina because it was not budgeted for and the folks will have to wait until the next fiscal year for help?
Lastly, governments run on estimations of income/spend/growth/etc, not actual numbers. It's quite possible to start the year expecting to 'break even' but at the end learning you've actually a bit off either way. How are they going to deal with that?
The idea of a 'balanced budget' make more sense back in the days when governments had precious little input to the life of the nation past defence, the legal system, a few score of elected officials and a tiny bureaucracy to run it all. Often, 'deficit spending' outside of wartime normally represented corruption, bureaucratic featherbedding [often seen in a 'spoils system'], extravagance and/or militarist over-spending. The state itself had few ways to raise extra finance and the Gold Standard made resorting to the printing-press very difficult. This is a state of affairs which vanished in 1914 and won't ever return.
Now, it's nothing more than a 'starve the beast' rhetoric by vulgar libertarians who want free lunches, or talking-points by corporate hirelings who dislike some aspects of the spend [like say, environmental regulation, or corporate crime investigators. Naturally, they like the spend on the tasty, tasty corporate welfare.] It sounds good because it follows the broken analogy of 'the country is like a household', which conveniently ignores the fact households don't have printing presses.
In short; it is a load of right-wing BS which should be given the contempt it deserves.
Let is take this pandemic for example. Predictions show that the US Federal Budget for '21 is going to be 'under' by ~17.5% even before any new spend is factored in. With the balanced budget rule, this means you'll need to cut by that number and/or raise taxes to pay for it. Modern Republicans don't accept tax rises for any reason, which means cuts. But military spend is about 50%, but that can't be cut. The #2 cost is Social Security at around 23%, but despite what right-wingers say, the bulk of this goes to senior citizens and so can't be cut. Result 'everything else' will need to be cut by 75% to make a balanced budget. That will make the UK's bone-headed Austerity look like nothing.
A 'balanced budget' strictly followed also means no surpluses. Therefore, this will require a) arbitrary emergency spending and/or b) tax rebates. As the govt is the largest single consumer in a country, having them spending in 'binge and starve' cycles would throw the rest of the economy out of whack; for the departments will run out and buy as much as they can in the 'fat' years in the hope it will tide them over the 'thin' years. Even worse, such a rule would mean the current national debt could not be reduced unless a disclaimer is put in to allow it.
As pointed out it means the Govt can't respond to emergencies, like a natural disaster. Would Washington delay assistance for say, Hurricane Katrina because it was not budgeted for and the folks will have to wait until the next fiscal year for help?
Lastly, governments run on estimations of income/spend/growth/etc, not actual numbers. It's quite possible to start the year expecting to 'break even' but at the end learning you've actually a bit off either way. How are they going to deal with that?
The idea of a 'balanced budget' make more sense back in the days when governments had precious little input to the life of the nation past defence, the legal system, a few score of elected officials and a tiny bureaucracy to run it all. Often, 'deficit spending' outside of wartime normally represented corruption, bureaucratic featherbedding [often seen in a 'spoils system'], extravagance and/or militarist over-spending. The state itself had few ways to raise extra finance and the Gold Standard made resorting to the printing-press very difficult. This is a state of affairs which vanished in 1914 and won't ever return.
Now, it's nothing more than a 'starve the beast' rhetoric by vulgar libertarians who want free lunches, or talking-points by corporate hirelings who dislike some aspects of the spend [like say, environmental regulation, or corporate crime investigators. Naturally, they like the spend on the tasty, tasty corporate welfare.] It sounds good because it follows the broken analogy of 'the country is like a household', which conveniently ignores the fact households don't have printing presses.
In short; it is a load of right-wing BS which should be given the contempt it deserves.
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Riain
Banned
I saw the theory explained, and it sounded great, but as you say it'd be tough to get though electoral politics. That said, countries have used their national windfalls to create Sovereign Wealth Funds and other forms to national war chests and Australia had a budget surplus for years under Howard and up until covid returning to surplus was a national political issue.
Riain
Banned
The problem with the US having a balanced budget is it's size and federal structure, making this a very tough job indeed. But is is a political problem and therefore inherently solvable with good politics. In good times excess government revenue could be put into a Sovereign Wealth Fund and that could be drawn upon in hard times to stimulate the economy, cover tax shortfalls etc.
But as you say, US politics is psychotic atm so this can't happen.
We did notice that Australia did/is still doing a lot of PPP/PFI jobs, at least from the Tunnels perspective, which shifts a lot of infrastructure spending off the government books and into just 'guarantees' which don't count towards the deficit.
We just design them so we stop paying much attention after they get built, but it seem like a good few of those schemes went bankrupt and I think a chunk of liability for their debts/comitments ended up back on the government books, but as a historic 'adjustment' so once again didn't count as "deficit."
Technically saving is a part of a budget. So it would not necessarily have to be spent. That said, I will echo the other posters who have said that politicians won't stick to it. And won't plan ahead enough to make it work. The problem is less the economics and more the psychology.
The trick with Keynes's "spend when things are bad, save when things are good", is that politicians don't want to spend less than their predecessor did, just to hand that surplus over to their successor and give him the chance to look good instead. Electoral and party interests get conflicted with economic interests.
The natural tendency they'll want to fall into is "spend when things are good, spend MORE when things are bad", like we're seeing now.
The natural tendency they'll want to fall into is "spend when things are good, spend MORE when things are bad", like we're seeing now.
Australia wasted the past decade because of this bone headed commitment to returning to Surplus which was barley achieved before the pandemic. We could have been doing a lot better things investing in healthcare, education, housing, infrastructure and combating climate change if economic policy wasn't driven by coalition scare campaigns.
Riain
Banned
Those things are State Government responsibilities, and the States get the GST revenue. How are the States going with their budgets and the discharge of their responsibilities, in particular during the covid crisis where they are front and centre?
Government expenditure as a proportion of GDP over the last 20 years.
Figure 2: total expenditure and the size of the economic response to COVID-19
Source - remarkably consistent across multiple governments...
Which was a tendency which Milton Friedman basically complained about - that 'prudence' is not popular with either the electorate or the political class. It's one of the reasons his belief in democracy was tepid at best.
Oz has wasted lots more than that. It's made a decent amount of $ 'extracting' her natural resources while not even moving up the chain. Two examples; she sells Japan timber and woodchip but in return imports paper, and sells China coal and iron ore but in return imports steel. The worst aspect may be Australia exporting agricultural crops, which in many ways is like exporting water.
Anyway, the thing is that if there was some stupid 'balanced budget' rule folks would simply cheat it. PFIs have been mentioned, but there's other ways, such as getting the central bank to issue dated scrip [like the 'MEFO' in the early Nazi Germany to hide rearmament], simply stringing out payment periods [with use of post-dated cheques etc], which is basically an enforced, interest-free loan from suppliers/staff to the state or finding loopholes, such as getting state-owned companies to carry the debt instead of the state itself or operating 'robbing Peter' exercises with say, pension funds.
Then we can enter the realms of what is downright fraudulent; from 'cheque kiting' [using lots of dated scrip and cheques to provide links to allow a very small amount of capital to perform the work of much more] to 'mismarking' [deliberately over-valuing assets, which would then be borrowed against for funds]. At the very worst, a whole 'parallel system' of finance may develop, with many things being funded 'off the books' by slush funds from illicit gains.
Yes, others have detailed it well. 'Balanced budgets' are a socio-economic catastrophe, usually with the goal of entrenching inequality though sometimes people genuinely believe there's some sort of equivalence between household and state spending. This could only exist in the context of a hard-right government, probably one that ignored democratic norms. It's just that destructive an idea.
That is an... unusual... description of recent German governments. The Schuldenbremse got passed by a 2/3rds majority in both houses and the government majority wasn't that big so a large chunk of notionally 'left' politicians voted for it.
Don't get me wrong I'm not sure it's not gone well for Germany; infrastructure is not in a good place, internet speeds are poor, as mentioned the Army is using brooms not machine guns and last year I think the entire submarine fleet was out of action at various points. I'm also fairly sure Germany would not have got away with it without being in the Euro, as a lot of the pain/cost has been been pushed onto Southern Europe.
But it was/is absolute not a hard-right project, in fact given the popular support it has it was barely a right wing project and it was entirely democratic.