Tuesday, 7 July 2015



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?


Random said...

GDP is a crap measure for all sorts of reasons. You are correct about transfer payments.
Government profit = private sector loss. Govt is not a business. It should not make cash returns.
The role of government should be to create as much real transactions as possible, tailored to create real wealth, whilst keeping inflation in check.
"Or am I missing something?"
Government acts like a big bank. Government "borrows" in the same way your bank "borrows" when you get paid in your account.
Spending works by crediting bank accounts. Taxes debit bank accounts. Bonds are sold as an interest bearing alternative to reserves.
Bonds are money. Cash is a zero interest bearer bond.
If the government spent by "printing money"/QE the only difference would be excess reserves in the banking system. Instead of " borrowing" savings and spending.
Paying bond interest is a political choice like all other spending. It is just a welfare payment so you can analyse it with all other welfare payments (and corp welfare) and decide which to pay if any.
The only change would be lower interest rates, but on the other hand this would mean lower interest income coming into the economy. Effect is likely to be negligible and uncertain.
Effectively government spends by printing money. And due to a simple maths progression as spending = income it will get all its money back if none is saved. Deficits are caused by people net saving but can be influenced by govt policy.

Mark Wadsworth said...

1. 'Borrowing' is exactly the same as 'money printing'.

2. Don't treat the government separately to the rest of us, think about 'the nation state'.

3. Let's look at the spending side and the tax side separately.

4. There are some things best done individually or privately (building cars) and other things best done collectively (building roads). Whether that road is paid for in money collected from us in tax or slave labour (everybody in the area has to work one day a week on it until it is finished) does not make a difference - overall it is a positive.

5 There is a Laffer Curve of everything. Some collective spending/action is very, very positive (law and order, immigration control, roads, refuse collection). Some is neutral (education, NHS and welfare up to a point) and some is negative (very long list).

6. Once you have spent as much as you can on the good stuff that's it. There is no point spending any more. There is no magic 'multiplier'.

7. If you spend more than that you are making things worse. Like your example with the company buying machine tools. If it buys what it needs, great, it can stay in business or expand. If it buys ten times too many machine tools and puts them into storage unused to rust, it will be losing money.

8. On the tax side there is also a Laffer Curve, LVT stimulates the economy and is a good tax, a flat income of up to say 20% is neutral, not a good tax but does not depress the economy much, everything else is bad taxes.

9. The trick is doing the good and neutral spending and collecting the good and neutral taxes and with a bit of luck the receipts and expenses match up.

Dinero said...

Government spending always contributes to GDP by definition of GDP.
for as in your example, Benefits, they are spent by the recipients so that will be included in GDP.

Whether or not Government spending increases GDP is a different matter.

If were true that there could be economic conditions where taxing doesn't decrease private spending and borrowing doesn't crowd out other borrowers then arguably it could do during that period.

Unemployment payments assist in the system of division of labour which is a key feature in the modern economy and the productivity of it.

Random said...

It's all a cycle. MMT describes it from a "spend first" this is "borrow first." It's just a different perspective.

Random said...

"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. "
Not always. Some tax is on savings. MMT shows that since savings act like voluntary tax anyway this is jealously.
The other perspective for this is real resources. Taxes take away real resources, as does net saving instead of spending, to 'make room' for spending.
So if you want to spend and you are *at capacity* you either need to raise voluntary taxation (saving) or tax to "make room" for spending.

Lola said...

R Sorry son, my opinion is that MMT is mostly nonsense. So I do not agree about your savings = voluntary tax.

But overall, thank you all - so far - for the contributions.

Random said...

To try and explain:
"Sovereigns can ‘borrow’ easily because they borrow automatically when people save to excess in the sovereign currency. They are the ‘borrower of last resort’ – enabling the excess saving that would otherwise be destroyed by a ‘paradox of thrift’ recession.
In other words they borrow in precisely the same way your bank borrows when you pay in your salary. It’s interesting we talk about being in credit at the bank, but never about being in credit with the government.
The only other aggregate alternative in a non-convertible floating rate currency is to spend the money, which creates taxation"

Random said...

"So I do not agree about your savings = voluntary tax."
Do you agree with the inverse, dissavings = voluntary spendings?