Balancing the Budget
This letter constitutes a permission to reprint or mirror any and
all of the materials mentioned or linked to herein subject
to appropriate credit and linkback. Every article published MUST
include the author bio, including the link to the author's Web site
(at the bottom of this message).
Balancing the Budget
By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"
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%
The government budget, therefore, is the single most important
economic decision, the most crucial economic event every (fiscal)
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
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
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
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.
AUTHOR BIO (must be included with the article)
Sam Vaknin ( samvak.tripod.com ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Global Politician,
Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a
United Press International (UPI) Senior Business Correspondent, and
the editor of mental health and Central East Europe categories in
The Open Directory and Suite101.
Until recently, he served as the Economic Advisor to the Government
Visit Sam's Web site at samvak.tripod.com