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This article was originally published at morganist economics. Copyright (C) 2020 Peter Morgan. The link below is to the original article.
https://morganisteconomics.blogspot.com/2020/03/budget-problems-and-solutions.html
Budget Problems And Solutions.
By Peter Morgan.
17:14 12/03/2020.
On Wednesday 11th March 2020 the new budget was presented by the Chancellor of the Exchequer the Rt Hon Rishi Sunak. Plans for a further £600 billion of government spending were outlined to develop national infrastructure and to stabilise the economy throughout the difficulties generated by the emergence of the Corona Virus. In the budget announcement the Chancellor made it clear funding would be made available for any requirement the NHS has whilst dealing with the Corona Virus outbreak, this should help to stabilise financial markets.
The planned increase in government spending into capital investment is the correct form of investment to support the economy. A stronger infrastructure and transportation network will help to enable efficiencies for businesses and open up new opportunities for trade. The main concern I have is the method of funding the capital investment projects, which is a proposed increase in government borrowing. There is already a high level of government debt, further debt might deter foreign investment in the country reducing private funding from overseas.
The increased borrowing will also generate greater government debt interest payments, which will have to be paid in regular instalments elevating the annual government expenditure. If interest rates rise the cost of repaying the outstanding debt will appreciate causing an even greater annual government expense. Interest rates tend to rise when inflation occurs, central banks are expected and often obliged to increase the interest rate as a mechanism to control inflation. Interest rates rise in commercial lending to offset the lost return caused by inflation.
When government spending increases it is usually accompanied by a higher rate of inflation, which in turn puts pressure on interest rates to rise. The expansion of government expenditure is likely to increase inflation causing a subsequent interest rate rise, increasing repayments for the even greater government debt. The costs of government debt interest payments could spiral out of control if inflation is allowed to rise. There is however another mechanism that can be used to manage inflation taking an interest rate rise out of the inflation control process.
Pension saving and pension reform have been used over the last decade to control economic outcomes. Alterations in pension saving allowances, pension regulations, types of pension schemes, pension fund investment criteria and an expansion in the methods of saving for a pension have enabled a closer adherence to the set economic targets than any other period of time I am aware of. This has been achieved when interest rates have been at constantly low levels, providing evidence that alterations in pension saving have been the active mechanism.
Over the last decade the pension saving lifetime allowance and annual allowance have been change significantly. There has been an increase in corporate bond availability to make fixed return and secure investments a greater proportion of pension fund investment portfolios. There has been an expansion in the required pension provisions within the country with the introduction of the mandatory employer pension scheme. There has been an overhaul of the pension regulation manual, which was so vast that it was renamed the Pension Tax Manual.
Pension saving has become the economic control mechanism of choice and it works. This tool can be used to control inflation preventing a rise in interest that will increase government debt repayments. The main problem is that reforms are currently only made annually rather than monthly, which would be more effective. If the government was to set up a new body to control pension saving on a monthly basis it could be used to manage inflation instead of the central bank, alternatively it could be used in unison with the central bank to hit set targets.
The other problem with the government's spending plan is the expectation for the taxpayer to solely provide the money needed to pay off the proposed increased government debt. The government has made taxation income the primary, if not, sole method of generating revenue. There are many other ways governments can fund themselves, for example new government business operations could make money to prevent the need to borrow funds to pay for capital investment. Many new business initiatives are only possible if the government enables them.
The pension economic control mechanism could be developed by producing new pension products that manage financial functions to hit the targets set by the government. These products would generate revenue for the government, which would avoid the need to borrow further funds for its capital investment projects. The plan of capital investment is a good idea to improve the country and support trade, but it does not have to be funded with government debt. The government can become a part of the wealth generation process in the economy.
The expansion of business revenue to pay for government spending can be drawn from other countries too. The government can only tax its domestic population, but it can trade with other countries around the world. Seeing taxation as the sole or at least primary revenue generation stream reduces potential government income and puts tremendous strain on taxpayers. By introducing additional income streams through new product development and international commerce the government can reach its new agenda without the expected costs.
Capital investment is a good way forward to develop the country and economy. It is a proven strategy to improve national economic output and living standards. The questions are more, where will the funding come from? Or, why does government borrowing have to increase to pay for spending if the government can make money? This might be the larger problem and it may have been this way for a long time causing the high government debt to occur in the first place. Put simply, the sources of government revenue have been limited but can be expanded.
https://morganisteconomics.blogspot.com/2020/03/budget-problems-and-solutions.html
Budget Problems And Solutions.
By Peter Morgan.
17:14 12/03/2020.
On Wednesday 11th March 2020 the new budget was presented by the Chancellor of the Exchequer the Rt Hon Rishi Sunak. Plans for a further £600 billion of government spending were outlined to develop national infrastructure and to stabilise the economy throughout the difficulties generated by the emergence of the Corona Virus. In the budget announcement the Chancellor made it clear funding would be made available for any requirement the NHS has whilst dealing with the Corona Virus outbreak, this should help to stabilise financial markets.
The planned increase in government spending into capital investment is the correct form of investment to support the economy. A stronger infrastructure and transportation network will help to enable efficiencies for businesses and open up new opportunities for trade. The main concern I have is the method of funding the capital investment projects, which is a proposed increase in government borrowing. There is already a high level of government debt, further debt might deter foreign investment in the country reducing private funding from overseas.
The increased borrowing will also generate greater government debt interest payments, which will have to be paid in regular instalments elevating the annual government expenditure. If interest rates rise the cost of repaying the outstanding debt will appreciate causing an even greater annual government expense. Interest rates tend to rise when inflation occurs, central banks are expected and often obliged to increase the interest rate as a mechanism to control inflation. Interest rates rise in commercial lending to offset the lost return caused by inflation.
When government spending increases it is usually accompanied by a higher rate of inflation, which in turn puts pressure on interest rates to rise. The expansion of government expenditure is likely to increase inflation causing a subsequent interest rate rise, increasing repayments for the even greater government debt. The costs of government debt interest payments could spiral out of control if inflation is allowed to rise. There is however another mechanism that can be used to manage inflation taking an interest rate rise out of the inflation control process.
Pension saving and pension reform have been used over the last decade to control economic outcomes. Alterations in pension saving allowances, pension regulations, types of pension schemes, pension fund investment criteria and an expansion in the methods of saving for a pension have enabled a closer adherence to the set economic targets than any other period of time I am aware of. This has been achieved when interest rates have been at constantly low levels, providing evidence that alterations in pension saving have been the active mechanism.
Over the last decade the pension saving lifetime allowance and annual allowance have been change significantly. There has been an increase in corporate bond availability to make fixed return and secure investments a greater proportion of pension fund investment portfolios. There has been an expansion in the required pension provisions within the country with the introduction of the mandatory employer pension scheme. There has been an overhaul of the pension regulation manual, which was so vast that it was renamed the Pension Tax Manual.
Pension saving has become the economic control mechanism of choice and it works. This tool can be used to control inflation preventing a rise in interest that will increase government debt repayments. The main problem is that reforms are currently only made annually rather than monthly, which would be more effective. If the government was to set up a new body to control pension saving on a monthly basis it could be used to manage inflation instead of the central bank, alternatively it could be used in unison with the central bank to hit set targets.
The other problem with the government's spending plan is the expectation for the taxpayer to solely provide the money needed to pay off the proposed increased government debt. The government has made taxation income the primary, if not, sole method of generating revenue. There are many other ways governments can fund themselves, for example new government business operations could make money to prevent the need to borrow funds to pay for capital investment. Many new business initiatives are only possible if the government enables them.
The pension economic control mechanism could be developed by producing new pension products that manage financial functions to hit the targets set by the government. These products would generate revenue for the government, which would avoid the need to borrow further funds for its capital investment projects. The plan of capital investment is a good idea to improve the country and support trade, but it does not have to be funded with government debt. The government can become a part of the wealth generation process in the economy.
The expansion of business revenue to pay for government spending can be drawn from other countries too. The government can only tax its domestic population, but it can trade with other countries around the world. Seeing taxation as the sole or at least primary revenue generation stream reduces potential government income and puts tremendous strain on taxpayers. By introducing additional income streams through new product development and international commerce the government can reach its new agenda without the expected costs.
Capital investment is a good way forward to develop the country and economy. It is a proven strategy to improve national economic output and living standards. The questions are more, where will the funding come from? Or, why does government borrowing have to increase to pay for spending if the government can make money? This might be the larger problem and it may have been this way for a long time causing the high government debt to occur in the first place. Put simply, the sources of government revenue have been limited but can be expanded.
