The Delicate Art of Balancing The Budget

Government budgets represent between 25% andUnemployment rates remain stubbornly high, so do
50% of he Gross Domestic Product (GDP), dependinginterest rates.This is the price of adhering to an
on the country. The members of the European Unioneconomic fad.Balanced or low deficits budgets are a
(Germany, France) and the Scandinavian countriesgood things when the economy is roaring ahead. But
represent the apex of this encroachment upon thethere are certain things that only governments can do:
national resources. Other countries (Great Britain, todefending the country, maintaining law and order,
name one) fare better. But even the more developeddisaster relief, ensuring market competition. One of the
countries in South East Asia do not clear the 25%more important functions of any administration is to act
hurdle.The government budget, therefore, is the singleanti-cyclically, to encourage economic activity in times
most important economic decision, the most crucialof recession - and to hold the economic horses when
economic event every (fiscal) year.The governmentthey go wild. A government cannot do this when its
finances its budget mainly by taxing individuals andhands are tied behind its back by a totally arbitrary
corporations. Ultimately, households pay the bill. Evenlimitation: no more than 3% budget deficit (why 3? why
corporations are owned by individuals and earn theirnot 2.65%?). This Maastricht criterion will prove, in the
money by selling products and services to individuals.long run, to be lethal to the very idea of a European
Higher taxes are likely to be passed on to customersUnion.What is a budget?It is a program. It charts the
or to employees. There are numerous kinds of taxes,government's expenditures and allocates its resources
regressive and progressive, direct and indirect, onfor a period of one fiscal year. Some fiscal years start
earnings and on property - but they all serve toand end in January (Israel), others in October (the
finance the budget.Another method of financing theUSA). But budgets always relate to fiscal years
budget is by borrowing either in the capital markets (bybecause of their dependence on tax revenues.
selling bonds as the government of the USA does) -Modern government budgets make a clear separation
or by "voluntarily" deducting part of the wages (asbetween current expenditures and the development
Israel used to do until a decade ago). Such borrowingelements. These were mixed in the past and this
has grave repercussions: the national debt grows, debtserved to cloud issues and to disguise gross misuse of
service (repayments of interest on the debt plus thefunds.But this structural separation did not change
principal of the debt) consumes more and more of theanything basic. Budgets are statements, mainly of
national resources and the government crowdspolicy. The budget delineates clearly - and if it doesn't
individuals and - more importantly - businesses out ofdo so, it surrenders through careful reading and
the credit markets. In other words, the money that isanalysis - the political, economic and social priorities and
lent to the government is not available to financegoals of the government which prepared it. Politicians
consumption, investments and working capital forcan talk a lot about the importance of this or that - but
businesses. The competition on the scarce resourceit is only when they put (other people's) money where
of capital increases its price, interest rates.their mouth is that an indisputable priority is established.
Government borrowing has disastrous economicMoney talks (loudly) and the budget proclaims the true
consequences in the long term: reduced consumption,face of the government which conceived it.In this
heightened interest rates, stagnant investments - allsense, a budget is also a monitoring tool. By comparing
leading to recession and negative or reduced growthfinancial projections, finances allocated to specific
rates.Recognizing these unfortunate results,purposes in the budget - to the actual use made of the
governments the world over have been converted tofunds and to the extent that they were expended, it
the new religion of balanced budgets or, at least,becomes clear whether the government "has kept its
reduced and controlled budget deficits.The two bestword", "changed its mind", or "reneged on its promises".
known examples are the United States and theA budget is a promise, it is a contract between the
European Union.One of the things which used toelected government and the nation, it is approved by
distinguish between political camps in the USA -parliament and has the status of a law. A budget can
Democrats versus Republicans - was their attitudebe altered only through a vote in parliament. It is a
towards the role of government in the economy. Thedocument of unparalleled importance, second only to
Democrats believed in an active government, whosethe constitution.Still, budgets (moreso than constitutions)
role it is to ameliorate the excesses of the markets.are like living organisms:As circumstances change, new
This logically led to less hysteria over the size ofpriorities and emergencies alter the allocation of
budget deficits. The Republicans firmly believe in Badresources. The budget is based on economic
Big Government and in the overriding necessity toprojections and predictions, not all of them successful
constrain it and to abolish as many of its functions asand come true.This is why additional or supplementary
politically and economically feasible. Small Governmentbudgets are introduced by governments during the
was a pillar of the treaty with the people which led thefiscal year. These are updated versions of the original
Republicans to their landslide Congressional victory inbudget. They reflect the changed reality better than
1994.It is an absurd that it was a Republican presidentthe outdated original. They help to redefine national
(Reagan) who was responsible for the biggestpriorities, reallocate resources, modify national
increase in the national debt since the USA wasspending.These budgets usually include tax increases,
established. He reduced the interference ofnew economic or social programs, or additional specific
government in economic life mainly by reducing taxes -expenditures. In some countries, the legislator must
without the commensurate slimming down ofshow where will money be found to finance the
government itself. The result was apocalyptic:newfound enthusiasm embedded in the new
enormous twin deficits (budget and trade), a collapse inexpenditure items.Budgets are also influenced by
the exchange rates of the Dollar against all majorexogenic factors, not controlled by the government.
currencies, recession and the steepest stock marketForce Majeure cases, like the floods in the Czech
crash in 1987.Today, the USA owes 5 trillion USD. True,Republic (3 billion USD) and in Poland (2 billion USD).
this is only 60% of the GNP - but this time statistics isGeopolitical processes like wars and peace
misleading. The interest payments on this "benign" levelagreements in the Middle East (the 1979 peace cost
of debt amount to 15% of the budget, orIsrael almost 4 billion USD to implement). The onerous,
250,000,000,000 USD per annum. This is more thandepressingly uniform demands of the IMF from poor
any other expenditure item in the budget, barringcountries: austerity, fiscal tightening, a monetary
defence. And it is getting worse.This, however, belongssqueeze, privatization, deregulation and so on.Some
to the past. Clinton is as much a Republican as anycountries are voluntarily subject to externalities: the EU
and both parties share the conviction that the budgetcountries agreed to amend their budget in order to
must be balanced by the beginning of the century. Itcomply with the Maastricht criteria. The French and
seems that it is well on its way there. The projectionsGerman Premiers appointed special committees to
of the objective and reliable Congressional Budgetreview the budget. The reports submitted by these
Office (CBO) are positive: the budget will be balancecommittees forced the governments to cut spending,
shortly, long before it was projected to do so.But itincrease taxes and tighten the fiscal discipline (never
was an American, Benjamin Franklin, who once (1789)mind that the French committee failed to take into
said: "Only two things are certain in this world - deathaccount the renaissance of the French economy and
and taxes". This spectre of a balanced budget alreadygreatly exaggerated the projected budget deficit). In all
provokes interest group to pressurize thethese cases an act of rebalancing the budget is called
administration to be less tight fisted and possessedfor.The USA has a peculiar budgetary procedure. Its
more of a social conscience.Nowhere was the newFederal budget is made up of 13 separate bills. They
"less deficits" doctrine more apparent than in theare submitted to Congress for approval by the
Maastricht Treaty and, especially, in its criteria. Theadministration. When the President and Congress
latter determine which of the member countries of thedisagree, some of the bills are not approved and
EU will join the Euro single currency zone in the firstcertain government operations are shut down. This
wave of entrants in 1999. One of the more importanthappened in the 1996 fiscal year. In fact, the budget for
criteria is that the deficit in the government's budget willfiscal year 1996 has been approved only after the
not exceed 3.0% of GDP ("three point zero" -1997 budget was.In the case of such a deadlock, stop
emphasize the Germans who are very worried aboutgap budgets are passed by Congress to allow the
the stability of the currency which will replace theirgovernment to continue to function until a final budget
treasured DM).As a result of this rigid criterion,is positively voted on.Budget are acts of humans. They
governments have increased taxes (France), imposedrepresent hard data implausibly coupled with
one time levies (Italy), engaged in creative accountingaspirations, projections, goals and hopes. They are
(again France with many others) or unsuccessfullyprone to mistakes, greed, cronyism, ulterior motives.
tried to do so (the failed attempt to revalue the goldThe existence of a mechanism to amend budgets is,
reserves in the coffers of the Bundesbank intherefore, of the essence and to be greeted. A budget
Germany). Some were aided by buoyant economiesamendment is often ceased upon by the opposition as
(France), others by favourable public opinion (Italy), yetproof of the government's fallibility and failure. But in a
others by farsightedness (Germany's Kohl). All of themchanging world - they who do not adapt through
pay a dear economic, political and social price. Bychange are doomed. Governments that amend their
restraining the budget deficit, they induce recession orbudgets midway merely admit that they are made of
fail to encourage budding economic expansions.humans and are doing their nation a service.