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Thursday, September 02, 2004

Economic Myth - Part 3

The budget must be kept in surplus.  Wrong!  Now we have had a relatively long period of economic growth (for the few) with budget surpluses.  Imagine beyond all fantasy that this will some day come to an end and a recession hits.  Less wealth generated means less revenue for the government and so in order to keep the budget in surplus the government has two choices:

1) Raise taxes.  This cuts the amount of private spending and saving, no impulse for growth there.

2) Cut spending.  So just when people need a hand, government money is taken from them.  Again less spending and saving, no impulse for growth there.

So sound economic management means that in hard times, the government incurs defecits in order to drag the economy back to the black.  In good times, budget surpluses pay this debt off.

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