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Government Budgeting – Trying to BALANCE the Balance Sheet

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Terry O'Flynn.

It’s a topic everyone likes to comment on: the budget—but have you ever wondered why it seems so hard for governments to get it right?

The fact of the matter is that government budgets are very different to manage than business or personal budgets. In part, this is because households and businesses have fewer moving parts to mitigate; however, they also have structurally different agendas, and that means they aren’t really going to intersect in the ways we might expect.

For instance, personal and business budgets are based on fiscal goals and results. A properly functioning personal or commercial budget will aim at a specific target, like saving to buy a house or to accommodate a new business capital expenditure. In each of those examples, compensations can be made in order to allocate enough funds towards the desired goal. The future homeowner can cut costs and potentially pick up more shifts to accumulate the necessary excess funds to come up with a down payment, and a projection of future earnings can be leveraged to secure a loan, factoring in some collateral. Similarly, a company can make projections based on revenue patterns.

A government budget doesn’t have the same linear trajectory to it, and that’s because a government budget is about more than managing profit. A government budget is expenditure-based. It is designed to match the spending that is necessary to support public assets and services and to offset future major infrastructure expenditures. Further, its objective is about satisfying politicians, bureaucrats, businesses, and the general public with the fulfillment of those services.

In order to generate more revenue to accommodate the desired public services and assets, the government can decide either to increase taxes or to cut other services. Since the revenue is also generated by the people who are directly impacted by any tax hikes or service cuts, the precarity of that decision is paramount. For instance, increasing the tax impact on businesses may force businesses to cut back to maintain profits and achieve their fiscal goals, impacting employees and new business acquisitions and investments. The resulting layoffs may mean taxpayers are forced to save more than they spend, and this in combination with fewer business investments in the economy could negatively impact government revenue, causing more deficit despite the increased potential for revenue from higher taxes.

So, government budgets are a bit like elaborate games of Jenga: a well-planned cut or re-allocation of funds can allow for growth, but the more thinly stretched it becomes, the more likely it is for the next cut to topple the entire budget into a heap of deficit.

The solution to the problem lies in allowing for growth without cutting the components that can support that growth, and that means politicians must prioritize to take care of both families and companies. Tough decisions will have to be made—and it’s impossible to keep everyone happy—but with the right strategy, and by keeping government supports in the right places, it is possible for economic growth to overcome budget deficit… it’s all about the BALANCE.

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