Shahab Sabahi
Energy and Environment for Development – Policy Analysis Research Group
For reducing budget deficits, governments face two policy choices, either reducing government spending such as health care or raising tax on rich. WHICH one is good?
There are many ways to judge the value of a policy target. To answer the above mentioned question we should answer to the essential questions. How can we distinguish between good and bad?
Utilitarian theory requires, which is one of the most dominant doctrines with stronghold in North America , a policy to maximize pleasures.
According to a utilitarian theory, it assumes that the rightness of an action depends entirely on the amount of pleasure it tends to produce and the amount of pain it tends to prevent. It describes the good not only as pleasure, but also as happiness, benefit, advantage. J. S. Mill particularly emphasizes the importance of pleasures. Thus the values of the consequences of an action are evaluated based on not only the quantity but also the quality of the action’s pleasure.
So if one accepts utilitarianism, its policy target must be set based on the greatest-happiness principle of majority as a standard of right and wrong. Hence, the Budget Deficit Reduction Policy should be judged as good if it improves the greatest happiness of the greatest number, by either increasing pleasure or decreasing pain.
The notion and motion that denies health care to the poor who outnumbers rich, is a BAD policy when it makes the majority unpleased.
By this standard: “should not deficit-reduction policy raise taxes on the very rich?” However one can sticks to only the collective cost-benefit numbers, so then the value judgment is not something it can justify at all on the basis of those numbers.
Shahab, decreasing spending and increasing tax are merely the two easiest ways to improve a government's balance sheet. But as you realise, self-interest means that even these methods are difficult. Even in relatively well-off Australia, partisan politics and self interest means that it is difficult to get such changes through.
ReplyDeleteBut what is needed is a thorough review of the revenue base, resulting in major structural changes. The trouble is, structural changes provide short term losers, even when everyone wins in the longer term. And the short term losers are much more vocal than the short term winners - even when there are less of them.
As a result, it takes a strong leader - with a strong stomach - to implement such major changes. Apart from the introduction of a Goods and Services Tax in Australia in 2000, there has been no serious tax reform here since the 1980s. And I believe that most other countries have had similar issues implementing long-term changes that provide short-term pain.
Politics aside:
ReplyDeleteThere is a very worrying principle here which is that many Governments have been spending money that they don't have.
What they should be doing is collecting and spending what they collect and what they should not be doing is borrowing to spend more than they collect.
The reason for this is quite simple - it transfers the liability of paying interest and repaying debt to future generations and to my mind this is immoral.
By getting the voting public used to the benefits of living off debt enabled spending you build up unreasonable expectations of what can be afforded by the state and you fuel unsustainable growth by distorting GDP by the yearly increase in debt.
As the debt rises, so does the interest burden, for the UK it is now £42.8 billion for 2010-11 and this interest charge will rise to £47 billion for the current year 2011-12.
If the borrowing was temporary and the Government balanced the books by years of tax surplus to offset year of tax deficits then none of this would matter but the current "spending" problem has been with us for years. It is also no consolation that this country is not alone in doing this - Just look at the USA, Greece, Portugal, Ireland, Spain, Italy, France, etc.
When the "Spending" spree starts to look unsustainable you get to a "Debt" crisis because ability to repay is questioned, interest rates are raised and eventually no-one will supply new loans - then you get to default or become a charity case.
The "Debt" crisis is the symptom, not the root cause.
A budget deficit reduction policy is simply a way of starting to reduce excess / unaffordable spending - hence the phrase "austerity" but in this case austerity is simply the consequence of being unable to continue previous levels of spending which were never going to be sustainable in the first place.
Unfortunately the bearer of bad tidings is never going to be popular hence back to politics.
Europe will survive perfectly well, the land and people will still be there long after political constructs like the Euro have been found wanting. It could have worked - the Germans insisted on the original Stability Pact which should have restricted spending sprees years ago - but breaches of the rules were ignored and now there is a real risk of countries being unable to pay bills as they fall due. The opposite of strike action - withdrawal of money rather than withdrawal of labour.
Ah, Shahab,
ReplyDeleteOne of the problems is that it takes governments too long to sort out from their ideology is actually what workable practice. Things may be wholly meaningful once that has been done, but if the electorate do not like this meaningful application beacuse it is a disconnect with their wants/needs then they start protesting and the consequence of that is a strike - like yesterday's UK pensions strike. The Heath Government of the 1970's was brought down by just such a mismatch. Some governments have had absolute ideological distasters usually led by dictators , but not always I think here of Mao Zedong's Great Leap Forward.... millions died for that piece of impractical ideology. The same is happening in Zimbabwe and if the EU falls, well God help us.
Just to clarify, I meant Euro not EU - sorry for confusion. Europe will always be around, but in what form. I agree with Tim,there is a very real possibility that if countries are
ReplyDeleteunable to to pay their bills as they fall due, despite all the financial leverage that the EU can give them ,then there is a real possibility of bankruptcy.This is almost unthinkable so politicians and bankers are not publically thinking it - they are a bit like rabbits caught in the headlights. But I ask this question: With whom will the buck stop and when?
It seems that our new complex system lost its touch with "value jugdments" and moves without vision. In a sense, it explains what Stephanie calls as "...the current generation do not.....". What i try to explore, through discussion, in my post, is the necessity of re-thinking, re-defining and revolve the new IDEA of PROGRESS and values. Profound changes kick off when value judgments shift.......This kind of approaches can be also implicitly read in far bottom of Stephanie's comment, ".....make sacrifices (e.t may be interpreted as value)..." It is true that policy without its goal and priority setting, is meaningless.....For setting priority, VALUE JUDGMENT is about everything
ReplyDeleteAt present the existing level of budget deficit represents a distortion to UK GDP of over 10%.
ReplyDeleteUK GDP is circs £1400 billion and of this GDP figure circa £150 is due to deficit spending.
Whatever painful choice the Government makes, let us not forget that Deficit Reduction is NOT debt repayment. Debt increases by the amount of the deficit and interest increases as the debt increases. When the markets start to believe that there is any hint of inability to repay, which they will at some point if the debt continues to rise, then the first consequence will be an increase in interest rate and every 0.5% increase in interest rates represents another £5 billion in interest
From a taxpaying lay person's perspective, it seems to me the issue is very simple. For years we lived beyong our means and now its pay back time. The Government has to reduce the budget deficit to prevent the interest rate from increasing (exponentially?) and our economy falling into *deep* recession, which it is in danger of doing. It took us 60 years to pay off our debt after WW2 and its outfall (who can remember the three day week?) We are now back to square oned ue to the development of a "we must have it all and we must have it now culture." There is no alternative but to swallow the bitter pill of either increased taxation or substantial cuts to services. Which ever route is chosen *someone* will complain of unfairness. Neither route is *good* if you are in the firing line. Perhaps the fairest way is to do both then everyone feels equally aggrieved - or pleased - which ever way you look at it. So in answer to the question posed by Shabab, "you cannot please all of the people all of the time".
ReplyDeleteWhat needs to happen - and no-one is saying this - is the development of a new Western World paradigm where we live within our means. This is a message that the current generation do not understand and I have to say, neither do the markets. Face up to the facts; the developed 'West' is is deep trouble and we *all* have to make sacrifices, regardless of what 'policy' says.
As a result of the continued deficit public sector net debt will rise to £905.3 for 2010-11 and the interest charge on this debt for 2010-11 will be £42.8 billion.
ReplyDeleteThis is the equivalent to the total sum raised by corporation tax.
If you ask people in the street whether they feel that "Deficit Reduction" means:
A - A reduction in the National Debt or
B - An increase in National Debt
Far too many people believe that the answer is A
Then perhaps they need to be better informed by Government. How many people in the street could answer the question : What is meant by the term "National Debt"? One has to start with first principles.. Deficit Reduction will mean different things to different people until they know the meaning of National Debt. Herein comes Shahab's 'value judgement' comment. Things only have value when they have meaning....
ReplyDeleteFascinating....lets get a quick preliminary conclution
ReplyDeleteAs Stephanie mentions, "Value", in qualitative and explanatory term, is attributed to the meaning of things.....Tim articulates the "meaning of the value of national debts" in numbers by means of a mathemtical and logical workout
So there are two possible causes behind the "contrary to principle"
1- Governments do not have a solid, clear, tangble, practical, REALISTIC ideology to base their doctrines and consequently give "MEANING" to things, as it was the case for the governments in the west over the 50s, to late 90s.
2- the prevailing deregulations in the global systems have long made governments ineffective and dysfunction. it may cause that governments' reactions not follow their principles (like French Monarch 17th, 18th, when their budget deficits forced them to bend for favor of their creditors)
No one in the real world of federal, state, local, and special district budgets use utilitarian theory. Zero based and performances based budgets have been attempted. But in the end, the executive proposes and the legislature disposes. The critical success factor is often this precious commodity called time - although Continuing Resolutions devalue the process.
ReplyDeleteInteresting........let's take and value a commodity, time, which is irreversiable for the base of "value judgments"......in this sense, time is better candidate for "value judgment" rather than the abstract term "performances".
ReplyDeletePerhaps you can share with is how governments in Thailand budget. That would provide a contextual framework from which to comment.
ReplyDeleteQ1. How do governments in Thailand estimate revenues and expenditures for its respective fund types?
Q2. What type of budgeting (line item, zero based, modified performance based) do governments in Thailand utilize?
Q3. Can you share some of the phases of the budget development, approval, administration, and close out process that are used for the fiscal year?
This would provide a clearer understanding as to how your proposal "fits" into a real world environment.
I intend this discussion to challenge the philosophy of policy goal settings in our days, without siding and subscribing in a particular philosophy.
ReplyDeleteWithout any doubt practicing the existing budgeting methods (norms) is a way to work out optimum resource allocation (economic aspects). But it is not all about everything when a complex system involves and the system as a whole must reach its stability. Perhaps “value judgments” and “priority settings” are the most controversial topics in the realm of policy design in the context of dynamic societies in a “real world”.
To answer your questions:
Having Thailand as a member of the global financial system, naturally it has to follow what the NORM, defined by the international financial governance, says. Therefore Thailand’s budget development is based on Strategic Performance Budgeting. (Introduction of output budgeting is essential element for establishing accountable governments)
In 1997 Thailand shifted from highly centralized line-item budgeting with dominant focus on input controls to a performance-oriented budgeting system emphasizing outputs and managerial flexibility. The “Hurdle Approach”, implemented during the period 1997-2000, failed. Strategic Performance Budgeting was introduced in 2001. The budget preparation moved to an output basis in 2004. The budget was presented in both a performance and results and a line-item format.
In fact the Asian Crisis 1997 was the driving force through which the Thai government reoriented the budget process and mandated sharp spending cuts in response to falling revenues, and reversed the normally surplus Thai budget into a string of deficits (IMF prescription!!).
Inevitably the reform trajectory was achieved at the expenses of allocative and operational efficiencies in economic and social aspects
Shahab, decreasing spending and increasing tax are merely the two easiest ways to improve a government's balance sheet. But as you realise, self-interest means that even these methods are difficult. Even in relatively well-off Australia, partisan politics and self interest means that it is difficult to get such changes through.
ReplyDeleteBut what is needed is a thorough review of the revenue base, resulting in major structural changes. The trouble is, structural changes provide short term losers, even when everyone wins in the longer term. And the short term losers are much more vocal than the short term winners - even when there are less of them.
As a result, it takes a strong leader - with a strong stomach - to implement such major changes. Apart from the introduction of a Goods and Services Tax in Australia in 2000, there has been no serious tax reform here since the 1980s. And I believe that most other countries have had similar issues implementing long-term changes that provide short-term pain.
The problem of a fiscal deficit is also much more difficult to solve if the country concerned also has a trade deficit.
ReplyDeletemore insights revealed.....great
ReplyDeleteTIM:...... two questions for you: in your earlier comment Dec 1st, you are wisely ask governments to spend what they collect. WHAT does tempt or MAKE governments spend over? Non-traditional security, uncertainity?
in the same comment, you view the EU will survive (certainly they stay intact). What is the chief force that will bring solidarity among the member states? do not they need uniform fiscal policy?
STEPHANIE..... in comparison, china, a state without the rule of law, can do better during crisis as its powerful centeralized STATE can formulize uniform MACROECONOMIC policies. However this won't be sustainable when crisis is over (Thomas). What you argue, perfectly makes sense
PETER.....true, system change and transition is always miserable for some.....losers' emotion win their logic (makes sense as they are much more in precarious position). So i'm wondering HOW can one judge "if losers stand against changes or try to change its trajectory by any means"? OR one should tell them the change is governed by natural law (evolutionary) and inevitable?
Governments are voted for by people and increasing money on the health service, on education, on job creation, on welfare etc. help win votes.
ReplyDeleteIf you want something and you get it you are happy and don't complain. If you want something and you don't get it then you are unhappy and do complain. Job creation, wage increases, pension increases, worker protection policies are all popular. Job losses, wage cuts, pension cuts, job insecurity are unpopular.
Governments have to choose between doing what is right (focus on value creation & country competitiveness) and doing what has, so far, been too easy (spending money by borrowing rather than covering spending with unpopular taxes).
Regarding Europe I do mean Europe not the EU and not the Euro, the formes will survive the latter - who knows?
Last night I heard my MP speak on the fiscal crisis. His comments on Europe, the Euro and Britain's role waffled between catastrophe for to a mollifying ' it will muddle through for a few more years". I was not encouraged as I got the feeling that while plans are being laid for catastrophe( his words) the prevailing value judgement is for ' lets muddle through'. A value judgement like that is of no use; decisve action- bold and tough is what's needed. No-one on Europe strikes me as having the toughness to do what's really necessary- not even Angela Merkel or Nicholas Sarkozy with their revaluation plan.Indeed Germans would be well advised to remember the 1930s. I think Tthe Euro must be devalued and those countries close to defaulting asked to leave . Then in a few years time a 'revaluation' might have meaning. This would be very tough on all Europeans The hardships experienced now are *nothing* to what's on the horizon and better the sharp shock than a long drawn out slow death. Batten down the hatches!
ReplyDeleteI fear for my grandchildren- what will they inherit that we have gifted to them through profligacy encourgaed b Governments.
Stephanie: I also worry for my children and grandchildren.
ReplyDeleteIf defaulting countries left then the downward pressure on the value of the Euro would go and to my mind the value of the Euro withouut some of the weaker economies would rise significantly.
In my view one reason for German competitiveness (not the only one) is having an artificially weak currency. The strength of the Gernam economy relative to others within the Euro zone is also a reason for flight of capital (and perhaps highly skilled people) from the south to the north.
I'm not so sure it would rise. I know that financially speaking that's what *should* happen, but one has to consider the ' value' of European markets to the rest of the world. In Germany's case for e.g., to whom they could sell their goods ....like Mercedes and Audi cars....? Greece/ Spain/ Italy etc would no longer be able to afford them. This would then put pressure on Germany's output and thus on the value of the Euro since they( and France) would be the main Euro holding countries. Devaluation might still be necessary to kick start buying power. The whole thing is a financial nightmare and I feel its a domino effect waiting to happen(or a Chinese takeover) We shall see!
ReplyDeleteTim....you are rightly argue that tax policy is unpopular as it is seen as source of pain......... you view governments in cross-road to pick between creating values / competitiveness or "borrowing" and you believe that they have borrowed as it is easy option.
ReplyDeleteDo not you think, governments have commited "borrowing" becasue:
1- they are powerless to collect enough tax? (the globalization allows money movement and westener investors are attracted by zero-tax regions) is not the case?
2- their income generation cannot afford both their nations' consumption pattern PLUS keeping up growth trend, so this makes them borrow to balance their budgets. (Growth theory perspective) is not it?
Stephanie.......your points broght an old question (its answer) to the fore, WHY did semi-united erupe in the 15th and 16th break down? Ferdinand and Isabella initiated but Henry, Phipp etc could not save it? They experienced the same fiscal problem
........and the result Shahab was SCHISM. Is that where we are headed now?If so I hope the UK keeps out of the mess. We are no longer a manufacturing economy but a service economy, so to whom will we sell services......not to Asia certainly as they have burgeoning service economies of their own. Taxation is a certainty and borrowing is a way to keeping money in circulation. But what happens when taxation is too high - so spending stops, borrowing is then curtailed and there is less money circulating..... its a vicious circle, like a merry go round that cannot stop.
ReplyDeleteWe are in uncharted waters right now. Not just with the Euro, and its inability to adjust for differing financial policies between member states, but from an understanding of what a post-services economy looks like. Following on from the Agricultural Revolution, the Industrial Revolution, and (if you want to call it that) the Services Revolution of the late 20th Century, where to now?
ReplyDeleteAs Stephanie points out, rich countries have nobody to sell services to. The 2nd-world Asian economies do it very well themselves, and the 3rd-world economies will reach to the cheaper 2nd-world (not the 1st world) if they want help. We have been in this post-services economy for some time, but nobody has been game enough to admit it, and instead debt has been used to sustain spending. The public don't want to hear bad news, so the sober voices get drowned out.
The US has been trying to fill the void with innovation, but is it enough? Can you sustain a 1st-world economy of 300 million people on R&D? The US$ has to fall a long way against the Asian currencies for manufacturing in the US to be viable again. But maybe that is the only option
I continue to be really worried by the words being used by politicians............
ReplyDeleteI asked a few more people yesterday whether:
"Reducing the fiscal deficit" meant reducing debt or increasing debt.
Most of them felt that reducing the fiscal deficit means reducing the debt - so the effect of the words is to give poeple a false sense of progress when actually the country is getting deeper in the mire - we are just sinking more slowly.
Oh dear,it seems to me we go round in circles on this one because actually there is no answer. We are in uncharted waters and we really do not know whether reducinng the fiscal deficit means we sink or swim! I'm not holding my breath, but I am getting out my swimming togs¬
ReplyDeleteStephanie......SCHISM, and it's scary, no matter Europe would go either ways that it went in the past, collapse (far past the 17th century) or competition (the 20th century) between memebr states......It sounds that the definition of progress needs another revision!!!
ReplyDeletePeter.......i wish R&D has been conducted in social development......the west had thoroughly jumped hundered thousands miles ahead, compare to others, due to DEVELOPMENT and PROGRESS in social thoughts before TECHNOLOGIES ......in our days, the west loses touch to social development