As the United States tackles yet another budgetary allocation, the question that is top of the mind is how best can the target balanced budget be achieved?
The fundamental choice continues to be the toss between balancing spending with taxation.
When this topic comes up for discussion I am sure you might be wondering if the word balanced economy is an exaggeration?
Or how best can a country base its allocations in a way that both supply sides, as well as demand bottlenecks, are addressed simultaneously.
Some of the most important factors influencing these judgement calls include the prevalent economic conditions, the bias of the existing political party and the trade ties that a country shares with others.
Another key deciding factor would be the type of export or import.
For example, if the country is a net oil importer, then obviously a significant part of the Budget would be geared towards servicing this debt.
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The Basics of Balancing the Budget
First of all let’s get a clear picture of what a balanced budget is all about?
When we talk of a balanced budget for a country or a nation boasts about a balanced budget it essentially refers to a situation where the expenditure and the revenue generated are equal.
Almost a Utopian situation, it refers to a state where the economy neither has a deficit problem or a surplus condition.
This balance can either be on an annual basis comprising of a span of one financial year, or it could extend for a cycle.
By cycle I mean a complete economic cycle.
This could comprise of a boom or a bust period.
Thus a balanced economic cycle talks of period where the economy might be seeing surplus during upswing in the markets deficit during times of negative returns.
Some of the key benefits of such a situation is…
- Bring down interest rates
- Help boost investment and savings
- Reduce the trade deficit
- Aid faster economic growth
However despite these, many economists believe that a balanced economy might not be the best case scenario always.
Especially in bust period, a deficit budget is a comparatively more desirable situation.
A cyclical balanced budget in comparison has a lot more supporters.
Most economists who argue for this state take a Keynesian perspective on the issue.
They feel while budget deficit acts as a fiscal stimulus during times of negative market trade, surplus in Budget acts as the restraining factor.
The various schools of economics continue to hold varying viewpoints on the kinds of economy they would choose or what type is more effective in maintaining the economic health of a country.
Many opine that deficits which are large but within limits to recycle savings from a growing GDP or gross domestic product is more of an economic necessity rather than a liability.
By Budget deficit, I mean the difference between the total planned expenditure and the total available budget.
A negative total is the budget deficit while a positive one if Budget Surplus.
Tools to Rein in Budget
There can be many approaches to a specific problem.
Without debating what would have worked better and how, let’s look straight into the several ways that can be employed to rein the Budget and not tip the balance even without raising the tax concerns.
As I mentioned right at the beginning, that the Budget is never the product of just economic concerns.
There are many associated elements, and all together they contribute to the essential policy making. Thus here are some options:
Look at Revenue Generation
Revenue is a strong tool if used effectively.
There are various channels through which an economy can look at generating income and funding its initiatives.
This is a key element in the overall economic construct and identifies points that have the maximum potential to benefit the exchequer in a way that could help meet up all the state’s expenditures.
Many economists have termed it as the least worst way to deal with a deficit conditions.
The finance department of the country needs to burn the midnight oil to devise strategies that can look to achieve this end.
The sale of assets is one key approach.
For example the US Federal Govt’s OMB Department or the Office of Management and Budget compiled a report in 2008 that said the Govt held public land that was worth $833 billion and this was a significantly higher amount compared to the loan obligations it had at that time which was around $209 billion.
Legislators should also explore avenues which have been thus far underutilized and can help them make significant additions to the exchequer.
For example, the US Govt provides many services like flood insurance, inland waterways and National Parks maintenance.
By raising the user fees for these services alone the Govt could rake in a considerable huge sum, given the scale of services and the widespread uses involved.
Floating of Bonds
When we talk of selling the country’s assets to expand the profit picture, it is needless to mention that one fundamental weapon used in the sale of these is the floating of bonds of various types and maturities.
The Govt can thus raise money via the issuance of these bonds.
This is perhaps one of the most basic tools employed to avoid raising taxes or cutting spending allocation.
Historically evidence supports the fact that many a time a debt issuance might be the best tool to boost the economy and directly deal with paying off the Govt’s long-term debt woes to a large extent.
Not just by floating bonds for the public but many a times as we saw in US post the Lehman Crisis, the Central Bank, Fed, in this case, bought the very bonds it issued to improve the cash flow in the market and stimulate the economy.
It was popularly known as the quantitative easing tools employed by the US Fed.
They bought huge amounts of government securities to help the economic recovery.
Expand Tax Base
It is often argued that more than raising the tax levels, it is very important to improve the base for it or rather the total number of people/organisation who can be brought under its cover and be made to pay the taxes that are due.
The Govt should also constructively look at steps to eliminate industry based subsidies, special exemptions and credit refunds.
These measures can instantly spike up the revenue generation cycle and bring in a lot more significant returns with limited transaction costs.
Also effective compliance through incentivizing the tax structure in a way that more and more people come under its net is seen as an effective measure in increasing the overall tax collection.
Tax Hitherto Untaxed Organization
Trying to capitalize on unrealized revenue potential is an operating word.
Many Govt operated institutions with reasonably high income or operating revenue.
If we take the example of the US economy, there are so many federal sponsored firms that are direct competition to the private companies, but have a major advantage in terms of, not paying any income tax.
The likes of credit unions, non-profit hospitals and many insurance companies all fall under this bracket.
There has also been an increase in the number of many non-profit units that are now engaged in profitable ventures.
While there are provisions for these organizations to pay income tax for unrelated business, a lot of them get royalties, rents which is considered exempt from the tax net.
It is often noticed that while theoretically there might be X individuals and Y firms that should be paying taxes yet millions of dollars are spent in ensuring that as many as possible actually pay their taxes and the number of total net payers of tax reach as close as possible to the original target set.
Another interesting and important element in improving the tax compliance is the way in which taxation policy is computed and how simple it is in terms of access by the average taxpayers.
By removing the complications associated with tax, payment can easily be instrumental in improving the compliance.
Tweaking the Interest Rates
Yes, even if it does not strike as the most logical solution, constructive tweaking of the interest rate can enhance the tax collection and the associated revenue generation involved in the process.
Interest rates form the core for most business development and have a significant bearing on all kinds of monetary transactions.
Hence, it is extremely important to regulate it in a way that brings out the maximum possible benefits potential for a given economy given the current conditions and the challenges associated with it.
Essentially by maintaining a low rate of interest, the govt can look at stimulating the growth outlook, as well as raise the target revenue generation in the process.
Thus, this can ultimately work towards servicing the national debt in a situation where tackling the deficit conditions might be the Govt’s core challenge.
Low-interest rates can also help stimulate the growth of individual and small businesses.
Also, this can thus be instrumental in generating employment and improving the overall income situation.
This can only be good news in terms of the health of the economy and the country’s Budget, which is nothing but the national record book of expenses and income.
Look at Ways to Grow the Economy
That logically brings us to the next destination on our economic chart, balancing the budget deficit by stimulating economic growth and bringing out maximum possible increase in the economic activity.
This is particularly important in bringing about an all round growth boost for the various elements that make up the construct of a working economy.
Economic growth is a direct result of additional manufacturing activity, increased retail spending and additional consumption of services associated with retail and consumer clients.
These can quickly provide a fillip to the revenue generation and overall collections at the exchequer.
Focus on Higher Job Creation
We need to understand a basic fact that an economy is ultimately dependent on the money that it can collect as taxes or in other words tax collection continues to be one of the most effective means of income for any country.
This is only possible when the people who are liable to pay income tax see a significant rise.
Another important fact is that the additional expense that the state incurs for the well-being of those who are unemployed and additional provisions have to be made for that.
This gain is a drain on the economy.
If the rate of employment rises as a result of the direct impact of heightened growth stimulus, more people will start paying taxes and less and fewer allocations for the unemployed benefits have to be made.
All of these translate into additional economic gains for the country’s economy.
Spending cuts continue to be one of the biggest weapons in the armoury of the country’s exchequer to boost the economic situation and enhance the revenue collection for the Govt.
Another interesting element is that they are relatively easy to implement and go a long way in sustaining benefits for the country over the long-term.
For example in the 1990s when Canada faced a significantly high budget deficit, they reduced this gaping difference to zero with the help of deep spending cuts, nearly 20% in the entire tenure that it took to reduce its deficit.
In the modern context, one particular economic mantra inspired by this very fact has been the Austerity drive that you have seen in many parts of South Europe after the 2008 economic crisis.
Many stagnating economies in the region pledged to cut as much as 50% of their spending to rein in the gaping deficit woes and bring about a semblance of order in the existing economic situation of the country.
Yes, it is another fact that most times implementation of these spending cuts could be an uphill task, especially in the light of losing political support and ever growing protest against any such proposed cut.
The huge delay in implementation of the austerity programme in European nations of the years of wrangling on the Social Security program in the United States can well be counted as screaming examples of the extent of turmoil which these spending cut proposals can stir, forget about actual implementation of these measures.
The other possible options in dealing with a budget imbalance could include addressing the inflation issues and tackling supply-side challenges of the economy.
The Govt can also work towards improving social, economic mobility.
Not only these are means to achieve a balanced budget, but can go a long way in enhancing the overall health of a country’s economy.