About That Surplus

By Tim Holland

It seems to me that the wrong approach is being taken when determining how governments should plan their receipts and expenditures. Government budgets, unlike personal ones, should not be dictated by the amount of funds available to spend but by the present and future needs of the society being governed. The concept of governments spending more than they receive is not a new one nor is the practice of returning excess tax receipts to the governed. The difficult part is to do it at the right time for the right reason.

Taxation is never an easy issue to deal with since it is such an emotional one. There are those who would argue that governments are grossly inefficient in their use of the people’s money and there are certainly numerous examples to support their thesis. However, converse arguments also show that they are the only entities truly capable of doing the people’s work that needs to be done. As is the often the case, both arguments are true.

Governments, it is argued, exist to do for the governed those things they are not capable of doing for themselves. Most reasonable people would agree with such a statement but what if we expand it to include those things that they are not willing to do for themselves and also those things that the private sector cannot afford to do. The original statement reflects the concept of the reactive government while the latter the proactive government. And here the arguments take flight.

The reactive approach identifies a need that is not being filled for a variety of reasons; one that individuals either cannot or should not be addressing on their own. The most simple example would be the rapid population expansion of a community that would dictate the commensurate expansion of its police force. It would not be either wise or prudent for local communities to establish neighborhood vigilante groups to protect themselves.

The proactive approach identifies a need that may not currently exist; one that individuals may not see as currently needed and is more directed at what might happen rather than what is happening. The most simple of examples might be in the area of disaster planning: the concept of spending an enormous amount of taxpayer funds on planning for something that everyone hopes will never happen.

The above examples are those that most people would not argue with since they seem to be the obvious role of government. However, to accomplish both requires a steady but ever increasing flow of funds, something that, for the most part, has proved not only to be difficult to achieve but also predictability unpredictable. Tax revenues fluctuate; the needs of the governed are relatively constant.

Surpluses are a reflection of a healthy economy: the more profitable the private sector the more corporate tax revenue that is generated; the more profitable the private sector the more jobs are created and the more income tax revenue that is generated. However, the reverse is also true, which brings us back to the reactive - proactive debate. It would seem only logical that when the economy is struggling, which means that the private sector is contracting rather than expanding and jobs are being lost rather than gained, that it would be the most disastrous time for governments to increase the tax burden on the governed. In fact, that would probably be the best time for governments to reduce the burden and thereby provide a support structure and even a stimulus in an effort to reverse the economic cycle.

The reverse is also true. It could very well be that the best time for governments to increase their revenues through taxation is when the economy is expanding. The pre-funding of projects (the proactive approach) may be the most effective use of surplus revenue. Certainly the retirement of debt would be the most prudent approach. The simple fact is that during an economic downturn, governments should continue their spending while reducing taxes. Economically, it is the best time to borrow, as interest rates would be declining. Conversely, during an upturn, governments should be

maintaining the spending rate while increasing taxes and reducing debt, as now interest rates would be on the increase.

So about that surplus? It would seem that it probably really isn’t there, since in an expanding community the satisfaction of the reactive needs of the governed are, by definition, usually lagging and the funds tend to disappear when they are most needed. Volunteering to make them disappear only to have to borrow them later doesn’t seem to be a sound economic approach.

Note:

This opinion/essay is the property of the author. It is offered for use by individuals who are also free to copy and make it available to other individuals as they wish. Anyone wishing to make use of the material for commercial purposes must seek permission of the author, who can be reached at Impressions@Tim-Holland.com. Such permission will not be unreasonably refused.