Wednesday, June 18, 2008

Cutting the Budget Deficit

There is so much talk about cutting the budget deficit. I really do hope that people know what they are talking about.

When the government goes into a deficit, it means that it is spending more than the revenue it collects from taxes, and income from investments - but mostly from tax revenue.

If the government goes into a balanced budget, it means that the government is not expansionary on the economy. The government is not stimulating the economy, money-wise. This means that the economy will be the same size as before, unless the private sector is bullish about the economy and invest.

If the economy is not fully developed, there is a need for the government to go into debt and spend beyond its tax revenue. This is before the government thinks it has a development plan that will help the economy in the longer run. It is legitimate for the government to go into a deficit.

If the government's role is unduly curtailed, then great reliance must really be placed on the ingenuity of the private sector. It has better lived up to its reputation.

Otherwise, running the budget deficit to zero is fashionable, but foolhardy.

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