Thursday, 3 December 2009

Your basic 2025 no-brainer: Govt spending is unsustainable

There’s one central point about Don Brash’s 2025 report that I’d recommend you try to get your head around. Fran O’Sullivan summarises the point:

    “The Brash taskforce inevitably pinged out-of-control Government spending as the behemoth which must quickly be slaughtered so that competitive tax rates can be introduced to give incentive for businesses, entrepreneurs and wage and salary earners to invest here and strive hard to build a successful future.
    “This is a no-brainer.
   “Core Government spending has exploded by 45 per cent since 2005 - a level which [even] Finance Minister Bill English says is unsustainable.”
    “Brash and his four taskforce cohorts . . . were deliberately cute in delivering Key and English a ready rationale for cutting spending back to 29 per cent of GDP.
    “This after all was the level of core Government expenditure registered in 2004-2005 before former Finance Minister Michael Cullen opened the floodgates on social spending.
    “All it required was for Key and English to start taking the axe to some of Labour's sacred cows, urgently review some major spending programmes, and get serious about setting measurable goals to turn this economy around.”

It is a no-brainer, and the fact Bill English says one thing and does another is not material to this particular point: That leaving the wealth in the hands of the businesses, entrepreneurs and wage and salary earners who’ve earned it allows them to build new wealth, whereas stripping it from them and giving it to government consumes it. That taking the axe to government spending is the sine qua non of real economic progress.

That’s the basic economic point right there. It’s nothing to do with a fetish for small-government, it’s a basic economic fact.

George Reisman explains it in simple words: that governments don’t create wealth, they consume it:

    “In the same sense as a housewife, the government is not a producer but a consumer, who is dependent upon producers.  All of its physical production, like hers, is in the last analysis a consumptive production. It is a production which cannot replace the means with which it began ...  a production which leaves the government poorer by the amount of funds it has expended.  In order to continue the activity, resort must be had to an external source of funds -- in the government's case, the taxpayers or the printing press.

Grasp that point, and you grasp just why a country that allows its government to consume nearly forty percent of its annual production year-on-year is economically unsustainable.

Economic progress doesn’t happen because you take capital from capitalists and give it to governments to pour down the big black hole called consumption – and remember that every since dollar governments spend is consumption spending -- it happens when capital is used to create further capital, which is used to create further capital, which is used to create further capital, ad infinitum

That’s progress.

It’s all about increasing the country’s capital – and the more capital we have per New Zealander then the higher New Zealanders’ wages can be, and the higher our productivity will be.

It’s a no-brainer – if you want to see New Zealand more prosperous.

Of course, if you don’t . . .

1 comment:

  1. There is I think a subtle distinction worth making here. The case for lower taxes is not that business and people always migrate to wherever tax is lowest. It is that they will migrate to where taxes and spending are at a level and quality that is most efficient - which is to say places where government provides goods it can most effectively deliver and leaves the rest to citizens to organise privately.

    This is why (Tiebout) competition between jurisdictions is important. It is a constraint on government that America's founding fathers recognised as important (and, incidentally, if Obama bails out the states that are in deep debt then federalism is dead). It is not that competition produces a race to the bottom on taxes, it is that it produces a race to the optimal tax/expenditure tradeoff.


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