A deficit budget, the implications.

The implications of a deficit budget

By GDL

Let’s start with the simple definition:  A deficit budget is the financial shortage  of the federal government's budget.  It represents more money being spent than is coming in via taxes and other income.

When the budget in deficit there is a shortfall;  to pay for this, the government has to borrow to fill the gap  and pay for the interest on top. Government debt is a debt on the nation, on every citizen’s head because the repayments come, and will come, from the direct and indirect taxes coming from citizens and businesses i.e. pay to the government on salaries, earnings and profits.

Economists say that when a budget is in deficit it means that the economy is expanding because more money is put in the economy through government spending.  Government spending is also an element in the calculation of the Gross Domestic Product where economic growth is measured. Government spending also means that money is spent on projects or to pay for social services so more money is distributed directly and indirectly to the people. The latter  will then spend the money which boost retail and consumption another element of the GDP and also an economic indication.  This is often called the multiplying factor of the dollar.
This scenario is seen mainly when there is a financial crisis when government intervenes in the economy to prevent further recession. This was clearly noticed during the 2008 GFC when the USA government injected trillions of dollars in the economy to prevent the collapse of banks, financial institutions and industries. The same thing happened in Australia when Kevin Rudd  spent billions on the School Reconstruction Program and the Insulation Program. He went even further in giving every taxpayer $800 in cash for then to spend. All these were meant to stimulate the economy and prevent a recession in Australia. In fact we escaped the recession by the skin of the tooth.
A deficit therefore, can have some merits in times of economic turmoil but it should not be a way of life for any government, because continuous and increasing deficits can lead a country into big troubles. There are clear cut examples with the Greece government being too generous, spending around like crazy and now the country is in deep recession. The FMI and the European Central Bank had to bail out Greece with stringent conditions of repayments. It can be said that Greece is governed by these international money lenders because the government has to abide to the conditions imposed on it and forced to run an austerity policy.
The situation in Greece is very bad. The salaries of public servants have been cut as well as pensions. Many businesses closed down and the unemployment rate is very high. There is both a social and economic crisis in Greece which is not likely to go away soon.The economic problem of Greece also happened in Ireland, Portugal, Spain and Italy and now in France. The governments of these countries cannot continue to spend as they used to do. They now have to be very careful with spending and their aim is to get back into surplus sooner rather than later.
The bigger the deficit, the more the interest and the less government can spend on policies that will benefit the nation as a whole. At times the interest is so big that the revenues cannot pay for, because when a country is in recessions it collects less tax as the economy has slowed down. This is a vicious circle.
A country running a deficit budget cannot spend on many items that would have been good for the welfare of the people. Direct and indirect taxes very often have to be raised. Infrastructure projects have to be put on hold, cuts made in the public sector and savings made as much as possible. These austerity measures in turn tend to contract the economy some might even say suffocate it i.e. they prevent growth.
Francois Hollande when he came to office saw the problem and pledge for a stop to austerity measures as these are also affecting other economies in terms of trade and commerce. He was quite aware that the collapse of the PIGS will in turn impact on France economy and this did not take long to happen. France is now in recession.
A surplus budget on the contrary means that government has amassed more revenues than it has spent and has some savings. With this excess money, the government can spend on better infrastructure, build more schools and hospitals, increase the pensions, recruit more public servants and improve the welfare of the citizens. Furthermore, these savings can be spent in times of trouble without having to borrow and pay interest. It is a very simple equation and reasoning.

In Australia, when the Liberals left Government in 2007, the treasurer Peter Costello had accumulated $50 billion surplus, and put some money in an infrastructure fund. For his first budget Kevin Rudd was surfing on the surplus of John Howard but the came the GFC and start the spending rounds of the Labor Government.Julia did not do better and the spending cycle continued. For 2012-13 the deficit was $19.4 billion and for 2013-14 it will be $18 billion.
There has been much pressure on the Labor government to stop the spending. According to Wayne Swan, they have identified some $43 billions of savings and expect the budget to be in surplus in 2016-17.While the intention is to be praised, it is not sure whether they will be able to deliver if they remain in office. However Tony Abbott has also pledged to return in surplus sooner and they will do more cuts and savings.

Time will tell and the elections are only three months away.