Dec 17, 2011

Fiscal policy & free market

The fiscal policy is that component of the political intrusion in the real market that caused and will cause many turmoils. The main reason of a bad fiscal management is a political refusal to undertake only those measures that are beneficial for the economy. Let me explain.

The things are more simpler. The public budget has four sources of finance: taxation, borrowings, selling public assets and printing money. First two are more used. Taxation has an immediate effect and borrowings have a delayed effect.

Also, it has two main categories of expenditures: investments and consumption. Only investment expenditures could create value added. For example, a current investment in infrastructure could be a good basis for future economic developments.

Therefore, if incomes are bigger than outcomes, this is a surplus. In the reverse situation, there is a deficit. The efficiency of the public budget depends on the real rate of return for expenditures. More current expenditures without a good return, less money for tomorrow and more debt.

Well, in nowadays the government didn’t cut sufficiently consumption expenditures and it is struggling with a sharply increase in debts. The focus of politicians is on short term - just only before the next elections. And, of course, a balance between current revenues from taxation and social benefits/ salaries for public sector is political very hard to be attained because that could mean a loss in the electors votes.

An increase in taxation, even temporary, is the worst decision that could be taken ever. Why?

Firstly, because it is a pro-cyclical measure and it will increase the public deficits and the rate of unemployment. Secondly, the debt burden will being more expensive.

The good news is, in the current political conditions, only a big failure could determine a real reform. If this will be the case, the benefits on long term will be greater then costs.

PS: Why political decisions are fair? The answer is in the previous article.

No comments: