There’s been a lot of talk about how the Federal government will pretty much be in deficit by the end of the reporting year, even if the budget is not.  The NSW government is essentially bankrupt after overspending so much and now, apparently, Queensland will follow suit.  I’m not sure how this can happen in Queensland as we have so much GST revenue and we’d have a pretty significant income stream from mining royalties, even if mining production is reduced somewhat.  But times are bad and we all have to tighten our belts.  This includes the government.  Their spending needs to be checked and double checked to ensure that it is not squandering our money.

I know that typically in hard times governments do think that they have to spend.  It’s not a classical or neo-classical, it’s somewhat Keynesian and as such grates on my sensibilities (funny how many things are doing that lately).  I find it funny that in the good times we do tend towards the more libertarian theories of economics and in the hard times we become more restrictive.  But the underlying idea of why governments need to change their habit is that taxation, interest rates and public projects can help boost the private sector to get through the hard times (as opposed to keeping wages and prices flexible to adapt to demand and economic conditions as the neo-classical would advocate).  And I’m actually tempted to say if it gives consumers confidence go ahead.  Reduce taxes and increase public works. 

However what is disturbing at present is that taxes are not being reduced and public spending rather than public works is being increased.  If we want to put more money in the hands of people to spend to boost the economy, the most obvious way for the government to do this is to reduce taxes.  That way people take home more of what they earn.  However in order to increase what people are spending the government has been increasing welfare, which is kind of disturbing.  First of all because the increased money to back this is not coming from increased revenue, but will have to come from borrowing or dipping into the savings from previous years.  Secondly money that has to go through the government before it is distributed to individuals and families is subject to what I have heard labeled as churning.  It means that the middle class that are paying out tax are also receiving it back in the form of welfare, however they don’t get the full benefit as some of the money is extracted to redistribute this money.  The preferable option for these people is actually to just significantly reduce the tax rate as a dollar received back in welfare actually equates to anywhere between $1.10-$1.40 if left in people’s pockets.  Essentially increasing welfare spending instead of reducing tax is the least effective way to stimulate spending.  But also it’s the borrowing to fund welfare that is not so good.  The bulk of the federal budget is welfare.  But to borrow to support it is really just wasting money.  It’s the equivalent of the government doing what Gen Y is criticized for doing – spending up on the credit card to get a new pair of shoes or iPod and only having a very disposable item to show for it.  It is fine for governments to borrow to complete big infrastructure projects – they are expensive however generally provide significant benefit to taxpayers.  In fact during previous economic downturns big infrastructure projects have been of great benefit to the country not only in providing much needed improvements to people but also in boosting employment.  The equivalent personal finance equivalent is that you only borrow to increase your assets or income, not to buy depreciating or disposable items.  But this is exactly what our state and federal governments are doing with their increased spending.  NSW is possibly the worst with things like standing by ridiculous policies like heavily discounted transport for various parts of the population.  And don’t get me started on how stupid it is for the state and federal governments to be spending so much on computers that will just have to be replaced in 2-4 years, especially when a high proportion of families have home computers and all schools have a computer lab (meaning that all Australian students have access to a computer).

So it is reasonable that we may see some deficits in our government budgets in the next few years.  It’s not ideal, but it can be helpful.  However it is far from ideal and even verging on down right negligent for government deficits and borrowing to come about because of welfare spending.