The Delicate Art of Balancing the Budget
Government budgets represent between 25% and 50% of he Gross Domestic Product (GDP), depending on the country. The members of the European Union (Germany, France) and the Scandinavian countries represent the apex of this encroachment upon the national resources. Other countries (Great Britain, to name one) fare better. But even the more developed countries in South East Asia do not clear the 25% hurdle.
The government budget, therefore, is the single most important economic decision, the most crucial economic event every (fiscal) year.
The government finances its budget mainly by taxing individuals and corporations. Ultimately, households pay the bill. Even corporations are owned by individuals and earn their money by selling products and services to individuals. Higher taxes are likely to be passed on to customers or to employees. There are numerous kinds of taxes, regressive and progressive, direct and indirect, on earnings and on property - but they all serve to finance the budget.
Another method of financing the budget is by borrowing either in the capital markets (by selling bonds as the government of the USA does) - or by “voluntarily” deducting part of the wages (as Israel used to do until a decade ago). Such borrowing has grave repercussions: the national debt grows, debt service (repayments of interest on the debt plus the principal of the debt) consumes more and more of the national resources and the government crowds individuals and - more importantly - businesses out of the credit markets. In other words, the money that is lent to the government is not available to finance consumption, investments and working capital for businesses. The competition on the scarce resource of capital increases its price, interest rates. Government borrowing has disastrous economic consequences in the long term: reduced consumption, heightened interest rates, stagnant investments - all leading to recession and negative or reduced growth rates.
Recognizing these unfortunate results, governments the world over have been converted to the new religion of balanced budgets or, at least, reduced and controlled budget deficits.
The two best known examples are the United States and the European Union.
One of the things which used to distinguish between political camps in the USA - Democrats versus Republicans - was their attitude towards the role of government in the economy. The Democrats believed in an active government, whose role it is to ameliorate the excesses of the markets. This logically led to less hysteria over the size of budget deficits. The Republicans firmly believe in Bad Big Government and in the overriding necessity to constrain it and to abolish as many of its functions as politically and economically feasible. Small Government was a pillar of the treaty with the people which led the Republicans to their landslide Congressional victory in 1994.
It is an absurd that it was a Republican president (Reagan) who was responsible for the biggest increase in the national debt since the USA was established. He reduced the interference of government in economic life mainly by reducing taxes - without the commensurate slimming down of government itself. The result was apocalyptic: enormous twin deficits (budget and trade), a collapse in the exchange rates of the Dollar against all major currencies, recession and the steepest stock market crash in 1987.
Today, the USA owes 5 trillion USD. True, this is only 60% of the GNP - but this time statistics is misleading. The interest payments on this “benign” level of debt amount to 15% of the budget, or 250,000,000,000 USD per annum. This is more than any other expenditure item in the budget, barring defence. And it is getting worse.
This, however, belongs to the past. Clinton is as much a Republican as any and both parties share the conviction that the budget must be balanced by the beginning of the century. It seems that it is well on its way there. The projections of the objective and reliable Congressional Budget Office (CBO) are positive: the budget will be balance shortly, long before it was projected to do so.
But it was an American, Benjamin Franklin, who once (1789) said: “Only two things are certain in this world - death and taxes”. This spectre of a balanced budget already provokes interest group to pressurize the administration to be less tight fisted and possessed more of a social conscience.
Nowhere was the new “less deficits” doctrine more apparent than in the Maastricht Treaty and, especially, in its criteria. The latter determine which of the member countries of the EU will join the Euro single currency zone in the first wave of entrants in 1999. One of the more important criteria is that the deficit in the government’s budget will not exceed 3.0% of GDP (”three point zero” - emphasize the Germans who are very worried about the stability of the currency which will replace their treasured DM).
As a result of this rigid criterion, governments have increased taxes (France), imposed one time levies (Italy), engaged in creative accounting (again France with many others) or unsuccessfully tried to do so (the failed attempt to revalue the gold reserves in the coffers of the Bundesbank in Germany). Some were aided by buoyant economies (France), others by favourable public opinion (Italy), yet others by farsightedness (Germany’s Kohl). All of them pay a dear economic, political and social price. By restraining the budget deficit, they induce recession or fail to encourage budding economic expansions. Unemployment rates remain stubbornly high, so do interest rates.
This is the price of adhering to an economic fad.
Balanced or low deficits budgets are a good things when the economy is roaring ahead. But there are certain things that only governments can do: defending the country, maintaining law and order, disaster relief, ensuring market competition. One of the more important functions of any administration is to act anti-cyclically, to encourage economic activity in times of recession - and to hold the economic horses when they go wild. A government cannot do this when its hands are tied behind its back by a totally arbitrary limitation: no more than 3% budget deficit (why 3? why not 2.65%?). This Maastricht criterion will prove, in the long run, to be lethal to the very idea of a European Union.
What is a budget?
It is a program. It charts the government’s expenditures and allocates its resources for a period of one fiscal year. Some fiscal years start and end in January (Israel), others in October (the USA). But budgets always relate to fiscal years because of their dependence on tax revenues. Modern government budgets make a clear separation between current expenditures and the development elements. These were mixed in the past and this served to cloud issues and to disguise gross misuse of funds.
But this structural separation did not change anything basic. Budgets are statements, mainly of policy. The budget delineates clearly - and if it doesn’t do so, it surrenders through careful reading and analysis - the political, economic and social priorities and goals of the government which prepared it. Politicians can talk a lot about the importance of this or that - but it is only when they put (other people’s) money where their mouth is that an indisputable priority is established. Money talks (loudly) and the budget proclaims the true face of the government which conceived it.
In this sense, a budget is also a monitoring tool. By comparing financial projections, finances allocated to specific purposes in the budget - to the actual use made of the funds and to the extent that they were expended, it becomes clear whether the government “has kept its word”, “changed its mind”, or “reneged on its promises”. A budget is a promise, it is a contract between the elected government and the nation, it is approved by parliament and has the status of a law. A budget can be altered only through a vote in parliament. It is a document of unparalleled importance, second only to the constitution.
Still, budgets (moreso than constitutions) are like living organisms:
As circumstances change, new priorities and emergencies alter the allocation of resources. The budget is based on economic projections and predictions, not all of them successful and come true.
This is why additional or supplementary budgets are introduced by governments during the fiscal year. These are updated versions of the original budget. They reflect the changed reality better than the outdated original. They help to redefine national priorities, reallocate resources, modify national spending.
These budgets usually include tax increases, new economic or social programs, or additional specific expenditures. In some countries, the legislator must show where will money be found to finance the newfound enthusiasm embedded in the new expenditure items.
Budgets are also influenced by exogenic factors, not controlled by the government. Force Majeure cases, like the floods in the Czech Republic (3 billion USD) and in Poland (2 billion USD). Geopolitical processes like wars and peace agreements in the Middle East (the 1979 peace cost Israel almost 4 billion USD to implement). The onerous, depressingly uniform demands of the IMF from poor countries: austerity, fiscal tightening, a monetary squeeze, privatization, deregulation and so on.
Some countries are voluntarily subject to externalities: the EU countries agreed to amend their budget in order to comply with the Maastricht criteria. The French and German Premiers appointed special committees to review the budget. The reports submitted by these committees forced the governments to cut spending, increase taxes and tighten the fiscal discipline (never mind that the French committee failed to take into account the renaissance of the French economy and greatly exaggerated the projected budget deficit). In all these cases an act of rebalancing the budget is called for.
The USA has a peculiar budgetary procedure. Its Federal budget is made up of 13 separate bills. They are submitted to Congress for approval by the administration. When the President and Congress disagree, some of the bills are not approved and certain government operations are shut down. This happened in the 1996 fiscal year. In fact, the budget for fiscal year 1996 has been approved only after the 1997 budget was.
In the case of such a deadlock, stop gap budgets are passed by Congress to allow the government to continue to function until a final budget is positively voted on.
Budget are acts of humans. They represent hard data implausibly coupled with aspirations, projections, goals and hopes. They are prone to mistakes, greed, cronyism, ulterior motives. The existence of a mechanism to amend budgets is, therefore, of the essence and to be greeted. A budget amendment is often ceased upon by the opposition as proof of the government’s fallibility and failure. But in a changing world - they who do not adapt through change are doomed. Governments that amend their budgets midway merely admit that they are made of humans and are doing their nation a service.
Sam Vaknin is the author of “Malignant Self Love - Narcissism Revisited” and “After the Rain - How the West Lost the East”. He is a columnist in “Central Europe Review”, United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia.
His web site: http://samvak.tripod.com
Previous Articles Highlighter:
Team Effort Pays Off For Entrepreneurs (1)
The next time you are lying awake in bed at 2 a.m. wondering how to deal with your entrepreneurial crisis du jour, consider the following: find, join, and participate in affinity groups.
Making The Dealer An Offer By Kevin Schappell (2)
You have spent hours researching, why throw that away buy getting nervous and signing a deal you do not feel is fair.Kevin Schappell maintains http://www.carbuyersclub.com where he gives advice on car maintenance, buying, selling, insurance, and financing.
Classified Ads What Works What Doesnt (3)
And on the average, these callers reported having limited or no Internet access along with limited or no computer / email capabilities in their homes. If they had access at work, it was limited and did not offer personal / private email.
Choosing The Best Life Insurance Option For You (4)
You will enjoy a guaranteed assured sum, and you may find that your insurer adds discretionary bonuses. Low cost UK whole life insurance: One of the cheapest forms of whole life cover, this type of policy features a decreasing term plan, and the policy is combined with a profits fund.
How To Use Humor To Increase Sales (5)
A cartoon can attract your reader’s attention and drive home an important point in a memorable way.The editorial page of any newspaper shows how effective humor can be in simplifying complex subjects and driving home a point of view.Humor also adds a visual dimension to your marketing, differentiating your message from your competitor’s.
Are You An Expert At What You Do (6)
In fact, there has to be. Who has the time or energy to reach 6 billion people all on their own? If you’re going to wait until you’re the acknowledged grand poobah and supreme expert in the universe, you will never create an information product.
What To Do When Your IT Project Is Late Over Budget And Looks Like Its Never Going To Work (7)
When this happens, budget dollars and man-hours are eaten away.SOLUTION: Give it more time. This vital step must be given due consideration. Adjust your schedule as needed, and you’ll find the rest of the process goes much smoother.
Naming Names How To Name Your Business Product Or Service (8)
For you, I am happy to share how I came up with "Slice A Day :: your slice on marketing"...First the purpose and vision of my site was to have people volunteer some marketing stories...true case studies of business owners and how they promote business.
Choosing A Merchant Account (9)
If an ISO is willing to lower their standard just to get a low level client, then it’s likely they will have numerous low level clients. Low level clients tend to consume more customer service resources.
Be A Storyteller Not Just A Speaker (10)
The Coach asks... what is your story? ©2004 by Sandra Schrift. All rights reserved Publishing Guidelines: You are welcome to publish this article in its entirety, electronically, or in print free of charge, as long as you include my full signature file for ezines, and my Web site address (http://www.schrift.com) in hyperlink for other sites.
Troubled Waters Require Capable Leaders At The Helm (11)
The area we can influence and affect is our own long and short-term strategies for transforming our companies, making them more competitive and customer focused.The bottom line is let's stick to our "knitting," do our jobs and focus more on our roles as organizational leaders.In North America we've proven that we can provide products and services competitively through innovation, inspired product development and comprehensive efforts to eliminate waste.
Successful Offshore Call Center Outsourcing (12)
Those of us who work in Asia know that it’s often the answers you don’t get which are the most important ones- and that answers should never be taken at face value.
Why Do You Want To Start A Home Business (13)
A totally unique complete business centre where there is no guess work required. Many people around the world are currently experiencing this amazing system right now! You can get the full details here: http://www.onlineincomecentre.cominfo@onlineincomecentre.com
Student Home Purchase Plan (14)
First, the property will likely appreciate in value, presenting the parents with equity that can later be used to repay student loans or their own personal use. Second, the rent the student would have paid to a landlord or dormitory is being used to repay the mortgage, creating more equity in the property.
What Is A Bad Credit Personal Loan (15)
Secured on your home, a UK Bad Credit Personal Loan can give you the freedom, for example, to do the home improvements or buy the new car you really wanted.With a UK Bad Credit Personal Loan you can borrow from £5,000 to £75,000 and up to 125% of your property value in some cases.
The Game Plan The Difference Between Small Business Success And Failure (16)
You create a business plan at a management meeting. A game plan is about tactics and is created by and for the people on the front lines. A game plan talks openly about the good, the bad, and the ugly in the business and is used by people in the business to make decisions every day.
SuperCharged Secret 1 Of 5 Credit Card Utopia (17)
They’ll send you a nifty letter in the mail with a bunch of blank checks. Have a feel day! Go pay off your other credit cards, transfer the balances, and start enjoying zero to low interest!
Gain 5 Horsepower This Weekend, For Practically Nothing By Nathan Morris (18)
In order to accomplish this, simply mark on the plug a small line to indicate where this gap is, and install the plug as normal. Try to line up the line with the intake side as best as you can.
Business Writing Tip Question Answer Format (19)
The material might have been handled conventionally, but the Q & A gave it a ring of detachment with inherently more interest, I think. You can evaluate it for yourself, at: http://www.managersguide.com/unique.htm .Question: Is there anything special about writing a Q & A?Answer: I think a Q & A can take many forms, but generally I'd recommend that you use a conversational tone if possible.
Start A Business For Under 1 (20)
Because of this fact, there is no need to obtain employees. Whereas a Business Program is set up as a separate entity used as a means to provide employment for the owner, and any employees they may wish to hire.
Newer Articles Highlighter:
Surviving The Workday In Your Organization (1)
At lunchtime - go for a walk - your organisation will survive without you for an hour! And besides, you need the exercise. Listen to your Mood - if you're carrying out your work with a pleasant attitude without forcing yourself too much - you're within your limits.
Common Mistakes Motorcycle Buyers Make When Looking For A Motorcycle Loan By Jay Fran (2)
They may also have too little cash to pay for insurance, maintenance, registration or new accessories for their motorcycle.Not asking the right questions.The first warning sign that motorcycle buyers should see is that if they do not understand the type of motorcycle loan, then they should be sure to ask a lot of questions.Here are some good questions to ask: Is the interest rate fixed or variable?
Time Out (3)
Essentially, exuberance within the housing markets and the equity markets will find "patience" more healthy than "irrational exuberance" as the Fed warns. "The Fact that our economical models at The Fed, the best in the world, have been wrong for fourteen straight quarters, does not mean they will not be right in the fifteenth quarter" - Alan GreenspanStay tuned, and be patient.
Achieve More In 2 (4)
Once you have determined a goal for yourself, take action within 24 hours. This will set the wheels in motion and create the necessary momentum you need. I once heard a speaker state, “We are either moving toward or away from our goals.” Develop the habit of taking action on a daily basis.
Ten Effective Ways To Reduce Your Business Costs (5)
You could have just borrowed the equipment from someone else or rented the equipment from a "rent-all" store. 6. Online/Offline Auctions You can find lower prices on business supplies and equipment at online and offline auctions.
The 6 Stages Of Modern Career Development (6)
Key characteristics: Conducting a job search Negotiating and accepting a job offerIn the Retention Stage, you will feel comfortable in your career field, as you will now have figured out how things work in your industry.
Networking 1 (7)
Since you may be very proficient in some of these areas, but not in others, reading and learning about these other areas is imperative. Of course, the question is, when do I find the time.
Working As A Knowledge Worker In The Information Age (8)
Cambridge , Eng. : Cambridge University Press.S. Whittaker and H. Schwarz, 1999. “Meetings of the Board: The Impact of Scheduling Medium on Long Term Group Coordination in Software Development,” Computer Supported Cooperative Work, Volume 8,pp.
This Is The Power Of PR (9)
Its power really lies in doing something positive about the behaviors of a business, non-profit or association manager’s important outside audiences – behaviors that MOST affect his or her operation.
Three Proven Steps To Improve Your Home Business Advertising Response In Just 1 (10)
You see, small businesses aren't supposed to advertise. Advertising is all about repeating exposures and building an image. Think about all of the many McDonalds commercials you see on television in a week.
7 Work At Home Mistakes To Avoid (11)
SPAM What is SPAM? Simply put, SPAM is unsolicited advertising. It is our belief that SPAM is in the eye of the person being SPAMMED, not the person sending the SPAM.
Something New For Managers (12)
Fortunately for you, there is a large collection of communications tactics available to you ranging from your own personal contacts, service or product promotions, news announcements and consumer briefings to newsletters, media interviews, emails and dozens of other tactics.
How To Negotiate A Settlement With An Insurance Claims Adjuster By Dan Baldyga (13)
So, the fact that you’re not buying his story, will go into your file to be read by that adjusters superiors.Once they do they’ll have no choice but to conclude that you’re no pushover!You’re going to stick to your guns because you’re right and the Medical Report your attending physician executed for Adjuster Smart is legit.
Step Back To Succeed In Decision Making (14)
One of the key elements to stepping back is to use your instinct. I have seen many people make decisions based upon data that they KNOW is false or incomplete.
Why PR Is An Engine For Economic Growth (15)
It won’t be long before those around you will be asking about progress. But you will already be hard at work remonitoring perceptions among your target audience members to test the effectiveness of your communications tactics.
A Mass Customization Revolution (16)
During the industrial revolution, customization was compromised to maintain low manufacturing costs. Today, however, you have the opportunity to choose to take the next step to processing power, user-friendly software, low wattage laser technology, and minimal to no setup time.
Better Decisions Balancing Efficiency BuyIn (17)
Almost every team that I work with struggles with decision making. This newsletter outlines a simple decision making model that is guaranteed to reduce the time spent spinning on decisions.
Why Mobile SMSText Messaging (18)
How to choose a high quality and reliable service provider for SMS/Text Messaging for your enterprise messaging needs? The first option that comes to one’s mind is mobile operators.
Why Your Mutual Fund Doesn’t Return As Much As You Think (19)
That's about a 3% decline rather than the 0.37% drop reported recently by fund-tracking firm Lipper Inc. The 0.37% decline is the gross return of the average US stock fund and does not include taxes or fees."Mutual fund investors should be offended by the amount of taxes and fees they have to pay," says O'Shaughnessy.
Useful Tips On Buying A New Or Used Car By John Mussi (20)
A UK Home Owner Loan is great if you want to raise a large amount; are having problems getting an unsecured loan; or have a poor credit history. Many lenders look more favourably on people who are home owners as this demonstrates a commitment to repay a large amount of money over a long period.