I was looking up 'austerity' in Wiki and this statement was in the article:-
"...Government spending contributes to gross domestic product (GDP), so reducing spending may result in a higher debt-to-GDP ratio...
This got me thinking. How does Government Spending contribute to GDP? Thing is there are two sources of government revenue - taxes and borrowing (we'll ignore money printing for the moment). Taxes are money taken from the productive economy that the owners of that money would themselves use if the government hadn't taken it away. So government spending that cannot increase GDP.
So the implication then is that governments borrow to increase GDP. That might make sense if those borrowings were invested, as in invested to make a cash return. In the same that a company will borrow to buy machine tools, say. But, by simple observation they aren't. They are just spent on benefits of one kind or another.
Or is GDP just a crap measure?
Or am I missing something?
Tuesday, 7 July 2015