by Josef A

Created on: May 11, 2009

The answer is plain and simple: Yes, it is the best way to cut spending. It can be shown that constraining fiscal expenditures is less harmful for the whole economy and every individual. To emphasize something at the beginning, the state is a useful institution also in economics and there are plenty of reasons why taxes have to be collected and money spent. Projects such as improvements in infrastructure, timely limited subsidies for new industries, upholding law and order, and providing national security are typical examples. For some of those purposes it is economically viable to take on debt and they may yield positive returns. The calculation is simple and the same as for any other business. If the expected return exceeds the costs expressed in terms of interest for new debt, borrowing cash is a rational choice.

So much on how it should work. Taking often Mr. Keynes as an excuse, states have mounted huge debts and they are reality. Most fiscal budgets are overstretched because of too much government consumption which is often unnecessary and does not yield any return. This is not to say that spending for social programmes is useless, that is rather a question of political attitude. Politicians will find arguments why virtually any government spending program is necessary and cannot be stopped and that is part of the problem. Politicians rely on voters. If you take a more objective view on things then you will find rather irrational, avoidable, and sometimes even ridiculous government programs in every country that has too high of a fiscal debt burden. The superiority of the option to cut spending is not owing to the fact that it is exclusively positive, but more because raising taxes is much worse. However, agreeing on the premise that fiscal balance has to be reinstated you only have those two choices. In economics taxes can be shown to always limit an individual's utility and are therefore to be kept as low as possible. In addition, civil servants are usually bad businessmen and everything the private sector can do, it should do even though political oversight might be necessary in some cases (e.g. nobody wants the state to run banks, regulation is, however, necessary).

So if the government has done all that, cut unnecessary spending and get rid of tasks the private sector could take over, fiscal balance is hopefully reinstalled. If not, then the state is underfunded and we are back to raising taxes. Taxes are a necessary evil and they have to be high enough to guarantee a sustainable fiscal budget. I am just convinced there is a lot the government can improve in their fiscal budget before starting to load us with higher taxes.

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