July 15, 2011

Austerity Means Prioritization and Rebalance: Not Flip a Coin and Go Cut!

The debate currently framed around simply Increase Gov Spending v/s Decrease Gov Spending is stupid. There is a Great opportunity to choose focus and rebalance, while affecting the much needed correction in Gov Income and Expenses towards achieving lower Annual Deficit to GDP ratios.

The idea of Governmental austerity measures especially makes sense when there is an accumulated deficit and an economic slowdown at the same time, and it looks impossible to wipe out the level of debt/GDP with economic growth that can be reasonably projected. The analogy used is that just like households cut in such a scenario, so should Government. Yet the analogists forget that when households go about cutting expenses in bad time, they show a method behind the madness:

Not everything is cut, there is focus and care behind what part of an expense head is cut, additional income is resorted to that is possible without killing oneself working, and the cuts-and-new income also enable some previously neglected expense heads to get additional allocations that they always deserved but many noxious expenses were preempting them earlier by misguzzling too many funds.

In other words, useful austerity is not as simple as cutting, rather a prioritization and rebalance, such that the debt servicing and current expenses get better against the GDP and current income, without shrinking the lifestyle that doesn’t need to shrink, and is the very purpose of existence!

Things to cut:

1. Complexity in the tax code, leading to harassment of the tax payer, and the need to hire too many people in the tax bureaucracy.

2. Tax loopholes and meaningless deductions.

3. Unfair tax provisions: Why income from active work ends up getting taxed higher than passive income from financial paper? Makes no sense, except maybe if this were restricted to people beyond retirement age, as there is no shortage of Capital these days.

4. Wasteful unnecessary-procedure bureaucracy – e.g. if you are in a town at the border of US and Canada, it is very easy to get onto a bridge that goes to the other country. There will be no signage warning you. Once you are on the bridge, you are not allowed to turn back. And at the other end, you will be stopped for not carrying passport and permit to enter the other country. Three officers will be involved in routine procedure and paper pushing to turn you back. Then at the home end, similar process will ensue involving another 2-3 officers! All for just saying, “Hey, if you want to cross over into Canada, you need to be carrying your passport!”

5. Any Government Departments not really needed – don’t have a list handy with me, maybe there are none? In any case, any excess procedure personnel can still be cut. e.g. instead of cutting teachers and music, arts and drama in schools, cut excess staff and procedures in Department of Education.

Things to improve allocations:

1. Teachers that deliver Education in schools. 50 student classrooms are not a good model of Education and militate against getting the young interested and excited about learning.

2. Music, Arts and Drama in schools.

3. Modernization of Road and Bridges.

4. High Speed Mass Transit.

5. Fundamental Research, including Space Exploration: Later on in life, one might choose to become a Quant Analyst on Wall Street, but a child really gets interested in Science because s/he, at the time, wants to be an Astronaut or Space Scientist or Firefighter or Forensic Detective. Take these careers away and you will find everyone studying Debit & Credit, or nothing at all!

The debate currently framed around simply Increase Gov Spending v/s Decrease Gov Spending is stupid. There is a Great opportunity to choose focus and rebalance, while affecting the much needed correction in Gov Income and Expenses towards achieving lower Annual Deficit to GDP ratios. The consensus to be built is for what Gov should and should not provide, and how to fund it with a fair, sustainable scheme of tax and deficit. This blogger suspects this'll yield agreement on focussed-lean Gov as opposed to simplistic "Small Government".
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