‘The government budget deficit’ is a phrase that has become embedded in our mind, as a ‘bad’ thing. You can’t spend more than you earn. But we have a completely illogical way of looking at government spending. some government spending is ‘good’ and some is ‘bad’. And the stated ‘deficit’ which results from the total is a figment of someone’s imagination, designed to communicate a perception, but not the truth. Let me explain, in non-economic language!
‘Good’ and ‘Bad’ Investments
Any government in any country receives money (income) and spends money (expenditure). The difference is either a ‘surplus’ (income is greater than expenditure) or a ‘deficit’ (vice versa).
Sounds simple. Ah, but government ‘expenditure’ is not all the same. For instance, for a given expenditure (say $10m), would you prefer the government built a new public asset (such as an extension of public transport, a school, a hospital), or would you prefer the government provided services (such as more police, border security, legal assistance)?
I know it’s not that simple, but here’s the principle: assets last a long period but services disappear as soon as they are provided. So, at the end of a year – a budget period – we still have the asset, but we have to spend the same amount again each year to provide the same services. Yet the ‘budget’ treats these items as equivalent, even though one is much more valuable than the other.
Of course, governments need to spend on lots of different types of activities, but the more you can spend on investing for the future (‘good’ investment), creating future benefits and not just current ones, the more chance the society has to improve itself. Should we spend money on preventative medicine programs, so people don’t get sick so much, or on hospital services to cater for them as they become sick?
And vice versa for ‘bad’ investments. Imagine if we didn’t spend on defence, police, border security, all of which have an ephemeral short term value and could instead spend that money on schools, hospitals, universities.
So governments make choices between ‘good’ and ‘bad’ investments on our behalf, but don’t distinguish between them when discussing the ‘budget deficit’.
Government Budget ‘Deficits’
The second issue that causes much of economic and political discussion to be useless is because of the calculation of the ‘budget’. What actually goes into, or is reported as, government income and expenditure and the resulting bottom line ‘deficit’? (It is possible for governments to have ‘surpluses’. The Howard government ran a series of surpluses that reduced Australian government debt to virtually zero, enabling subsequent governments to incur deficits and get Australia through the GFC.)
Calculating the budget has many issues. Different choices on each issue lead to different reported ‘deficits’. First, some government income and spending is counted and some isn’t! If governments can create autonomous bodies (eg NBN, CSIRO, Australia Post, joint ventures), the spending (and income) of those organisations is not counted in the reported ‘deficit’. Only the contribution – if any – which the government makes to those organisations is included.
Second, governments count some expenditure on a ‘cash’ basis (record it when it is spent) and some on an ‘accrual’ basis (record at the times the money is used). That’s why public officials often rush to spend their own department budget within the budget year because, if they don’t spend it, any surplus gets taken away! On the other hand, a government may wish to present a better picture for this budget year, so it defers spending announced expenditure till the following financial year (eg delaying the cash payments from June to July will do it), even though the benefits may well have already started to be received.
Third, the budget is extremely complex, so manipulation of what is included and what isn’t and where it is shown is pretty easy, especially in these days where media have less time to investigate difficult or long-term issues. That’s why the government often makes (bad outcome) announcements on Friday nights, holiday periods, or at year end. People and the media are focussed on other areas, so government announcements are often missed at those times, or cursorily reported.
Fourth, the ‘deficit’ is often announced now as a single figure, not just for the current year or the next year, but for some arbitrary period eg “The budget deficit will be $25 billion for the next four years.” Sounds clear but let’s think about this. What we concentrate on is ‘$25 billion’. What we don’t concentrate on is ‘How does each year contribute to that?’ The answer is often that the government has rigged the figures, either by front-ending the income or back-ending the expenditure to give a better picture than might be shown by the true current year’s ‘deficit’.
And there are many other ways to manipulate the reported ‘deficit’. So much so that’deficit’ really has limited real meaning, except perhaps for the trend line – which way are the figures going over time? (And in Australia, unfortunately, they are all headed in the wrong way, regardless of which definition or set of figures you are given and which government is in power.)
So what does all this mean?
It means that the system provides little idea about the amounts of ‘good’ or ‘bad’ spending, or the true deficit, because governments mix up spending on items which have completely different value to the community. The system counts some expenditure but not others and arbitrarily adds years together for reporting. Coupling that with deliberate manipulation by (all) government of how and when they report deficits and reduction in the power of mainstream media to investigate the complexities, we are almost bound to come to the wrong conclusions about the nature and importance of the size of government and the deficit.
What should we do?
Be aware, when government spending is being proposed or discussed: is this ‘good’ spending (ie expected to have long term benefits for the society) or ‘bad’ spending (ie expected to be completed within the year for services which will have to be repeated again next year)? This is doable. This changes the way you read and think?
Develop a new system of government reporting which classifies spending differently, so we can distinguish more easily between these types. This is very difficult, but possible, but not by you!
Demand that governments are more honest in their reporting. Kick governments out (whatever their political persuasion) if they are found to deliberately produce misleading information. Unfortunately, I think this is almost impossible…but we can try!