Tuesday, 7 April 2020
In the current crisis, many people are talking about 'defecit spending'. But just exactly what is defecit spending and why does it matter?
Basically, a deficit is produced when a government spends more money than it collects in tax revenue. The government then prints more money to cover the gap. The idea is that the amount of money created is justified by the size and expansion of the economy. It is able to print more money because it sells bonds or obligations to finance the deficit. The deficit is not only on paper but is a real obligation to pay those who hold the debt - it can be individuals holding government bonds or even nations that buy our debt. People are willing to do this for the return they get - that is, the interest that the government pays on the debt - and until maturity, the bond can be sold. The government can issue new bonds to pay off the old bonds that mature. The government is not obligated to pay the principal of the debt before the maturity date but only the interest.
When a government continually increases debt, more and more of the annual budget goes to finance or service the debt by paying interest. That means that for every hundred units of tax collected, an increasing number of units has to be taken just to pay the interest of the current debt. Those interest payments do nothing for the people of the country other than keep the debt balloon afloat. This generates an ever increasing squeeze on the revenue stream of a government. They cannot spend as much money as they receive from the people for the people, because more nad more gets taken for interest payments on money borrowed for previous years' spending.
Economists generally agree that if you take too much out of the private sector (by tax) to finance government programs, business expansion slows down. The growth in the size of the wealth pie can even shrink. More people become poor. The big debate among economists who have differences is tcouto where that point of too much taxation is. However, a growing deficit adds another big challenge. A point is reached (as with Greece) where the interest is so large that the government no longer has the funds for its spending for the public good including social welfare programs. Higher taxes are no longer an option. As such the expanding deficit at some point can destroy social welfare.
Why does defecit spending happen? Because politicians spend for the immediate future and for their own re-election. Taking the long-term view is not to their personal benefit. Politicians lack self-control at all levels. They want the program for their constituents now and will increase the deficit to achieve this. It also is to their political benefit. Deficits are too abstract an issue for most voters. Who votes for fiscal responsibility? People vote on the basis of their immediate prosperity. However, slowing the expansion of government so that the government lives within its means, will over the long haul produce much more funds for social spending. But social spending is squeezed when so much goes to the deficit. There would be so much more to spend today if politicians did not pile on deficit after deficit in the past. The end result of all this is either cutting benefits or massive inflation to continue to pay the face amount in money that is of much less worth. It can lead to national bankruptcy, and no country wants to default on its obligations or there would be deep depression. Deficit spending will ultimately destroy justice-social welfare spending ability. This has happened in other nations. This can then lead to social upheaval and disintegration.
Defecit spending also creates the problem of future commitments to legally mandated spending for such things as social security and social medicine. These become seen as entitlements; we are entitled to this! These programs are perpetual and take up the largest share of government budgets. The projections of revenue and these mandated obligations are such that economists project a huge deficit as well for these programs, even if not a present deficit.