A lot of people in the personal finance blogosphere are at least ostensibly anti-debt. I’m not one of them. While I agree that no debt is better than any debt, I also believe that not all debt is evil and that borrowing can often serve some very useful purposes. Borrowing to purchase a house, to get an education, or to increase your earning capacity is not only justifiable, but it can also be a wise financial decision. However, if your debt results from the fact that your routine spending exceeds your routine income, you’ve got a problem on your hands and there are only two real solutions- spend less or make more.
Fundamentally, governments are in the same situation. If a government is running a deficit, it either needs to cut program spending or increase taxes, and neither option tends to be particularly palatable with the electorate. As a result, governments will often times take the third route- run a deficit, further increase the public debt, and let the kids worry about it. In the current economic downturn, a number of governments are suddenly looking once again at budgetary deficits and trying to rationalize their decision to keep spending even when the money isn’t there. The reasoning is typified by that offered by Ontario Premier Dalton McGuinty yesterday when he stated, “I’ve got 200,000 people who have lost their jobs, so now I’m going to shut down their hospitals? It just doesn’t make any sense.”
While it makes for a pretty sound bite, the logic is specious. Cutting spending doesn’t necessarily mean cutting essential services, and it is ludicrous to even suggest that this is the only way to trim the government fat. It’s like suggesting that someone trim their personal budget by cutting electricity and food before eliminating their weekly spa visit. Give us some credit, Mr. McGuinty. There are many areas to cut before we hit the bone of essential services, and it tough times it may be necessary for a responsible government to make those tough choices and operate within its means.
But there is a bigger question here as well. The Keynesian / Galbraithian school of thought says that a government can prime the economy during tough times through increased spending on things like infrastructure and directed measures to get people working and spending. While no deficit will usually preferable, does it make a difference if deficit spending is focused on economic stimulation? Are there certain areas in which spending should be targeted, or does all government spending contribute to a healthy economy?
I’ll be the first to admit that I am no economist and my understanding of macroeconomics is rudimentary at best, so I’d like to open up this discussion to you. In the current economic climate, how can governments best cope with budgetary deficits?
Photo by JaulaDeArdilla.
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{ 5 comments… read them below or add one }
Cutting programs isn’t the answer and only causes a snowball effect and further chills the economy. There’s a broader social impact and most government programs are needed the most when things get tough. Gov’t is in a better position to borrow money and continue to look after citizens than individuals are.
Keynesian investments and spending cuts (or balanced budgets, for that matter) aren’t mutually exclusive. Governments have to do both. This means spending money to promote economic growth/recovery while still being fiscally conservative and accepting that some of the luxuries of boom times must be the sacrafices of bust times.
I think the answer has to be cutting the expenses we can’t justify. The national debt is a burden that we’ve got to tackle no matter how tough times might be. The debt should only be going in one direction, and that’s down.
Sudden changes in economic forecasts are the reason why it’s important to have budget contingency amounts set aside, like we had up until a few years ago. It’s kind of like a government emergency fund.
In other words, I have to live within my means, and so does the state. No exceptions, no excuses.
You’re right in saying that there are two solutions to a deficit- either cut expenses or increase income.
But it’s important to take a long term view- to increase income over the long term sometimes requires injections into the economy and a focus on innovation and growing industry. If this requires short term deficits to promote long term sustainable economic growth, so be it.
I’m leery of letting governments run deficits, mostly because once they start they’re really hard to stop, even after economic conditions improve.
However, I think recessions are times for governments to take advantage of cheap labour and commodities to plan for the future and build buildings, roads, subways, schools… as long as they remember to go back to a surplus to pay down that debt in 2-3 years (which is the hard part).