The Only Direction for the Aussie Economy is Down

19.12.2016 • Investing

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By Kris Sayce – Port Phillip Insider (Australia) –

We can only assume the current surplus pledge will be ditched in 2020…regardless of which party is in power.

In case you’re not sure, a quick lesson on government finances.

A deficit is when a government spends more money than it takes in through taxes. If a government spends $400 billion, but only raises $350 billion in taxes, it has a deficit of $50 billion.

That’s easy. The question, then, is: How does the government pay for all of its spending? It issues debt. In this example, the government would have to raise $50 billion in debt to pay for its spending.

Here’s the problem: Unless the government starts with a clean slate, not only does it have to issue debt to cover that year’s shortfall, it also has to issue new debt to pay for current debts that will fall due that year.

This is what makes it so difficult for a government to pay off its debts. Even just one bad year can throw a proverbial spanner in the works.

Let’s say that, in our example, the government did have a clean slate — that the $50 billion deficit was its first deficit, and its first debt.

In order to get back to square one the following year, the government’s spending would have to either remain at $400 billion, while it’s tax revenues increased to $450 billion (up from $350 billion the year before), or it would have to fall to, say, $350 billion, while it’s tax revenues increased to $400 billion.

Those are just a couple of examples. The point is that, whatever the outcome, in order to repay the debt in a single year, tax revenues need to be $50 billion higher than spending.

And that doesn’t even include interest expenses.

Of course, the reality is that when a government goes into debt, it’s due to a major economic shock. The result of that shock is that government spending tends to increase due to welfare payments, stimulus measures, and so forth.

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