I am getting a bit nervous about the budget that’s brewing, no longer behind the scenes but with a few strategic leaks breaking into the news. As you may know, I am no Keynesian but I went back and took a look at my own Free Market Economics text since I could not remember whether I even mention the word “deficit”. The index has it listed once, three pages from the end on page 332.
Here are my thoughts on things. Why they left a Labor-supporting Keynesian to manage Treasury in the single most important budget they will ever introduce is beyond me. Anyway, here are my thoughts.
It’s not the deficit per se that matter but the level of public spending.
If you want to fix the economy, resources must migrate from being under the direction of the public sector and into the hands of the private sector. Therefore, the focus should be on cuts to non-value-adding forms of public spending. If it doesn’t show a positive return within a reasonable period of time, cut it off. This, by the way, is not an anti-welfare message although welfare too must be affordable. I am talking about infrastructure and the many forms of waste and mis-regulation that are found at every turn.
The economy will grow, employment will grow, real wages will grow if and only if economic activity is directed by private sector entrepreneurs. It will shrivel under the direction of government. Do not even imagine anything much beyond the first 10 percent of what you are already spending will create economic growth. Cutting public spending will create growth, not maintaining existing levels.
Raising taxes to fund public spending is a deadly mistake and wrong twice over:
. Higher taxes will allow you to maintain the level of public sector direction of our scarce economic resources.
. Higher taxes will reduce activity in the private sector.
The core aim must be to encourage entrepreneurial activity. There is no budget problem that cannot be fixed by:
. Reducing the level of unproductive public spending
. Fostering private sector growth (where unproductive spending has its own very brutal cure).
If the strategy is to balance the budget in ways that will diminish private sector investment and entrepreneurial activity, it will make things worse, not better. Economic conditions have been improving since the change of government with nothing much at all having been done. Leaving things alone is better than introducing new programs or raising taxes to fund existing forms of waste. Step back, get out of the way, cut your own take up of resources. But for heaven’s sake, don’t apply some bizarre Keynesian budget-surplus strategy by funding the existing level of public spending at the expense of the private sector.