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Living Within Our Means As A Household And As A Country
Our Income
As individuals we receive incomes from various sources, but
mainly from our employment earnings. Based on our incomes,
we are able to afford certain goods and services. Our income
levels should therefore serve as our guide when deciding on
our expenditure levels.
Government derives most of its revenue from taxes paid by
the citizens of the country. These taxes are paid on income
you earn, on profits generated by companies and on goods brought
into the country. This revenue is then used to provide goods
and services for the citizenry; such as health, education
and other social services. It follows therefore that there
is a direct link between the individual’s income and
the income of the Government. Should citizens be unwilling
or unable to pay taxes, this would negatively impact government’s
ability to provide key essential services.
Living Within Our Income Levels
Whether you are a government worker, private sector employee,
or your own boss, you have to watch your spending. You try
to ensure that you make enough to cover your bills. At the
end of the day if this income is more than your expenses,
you are left with some monies (savings) that can be deposited
in the bank or invested in other financial assets such as
government treasury bills or shares in companies. If, however,
your expenses are more than your income, then you may have
to withdraw money from your bank account or borrow from a
family member or friend. If your expenses continue to exceed
your income, the time will come when you will be caught up
in a terrible debt situation, where every month you are unable
to pay all the bills. For example, you may find that you are
unable to pay the hire purchase people, and they repossess
your lovely sofa or stove.
Now, imagine the government as a bigger household that manages
the income and expenses of the entire country. When revenue
exceeds expenditure there are savings, also referred to as
a fiscal surplus; however if expenditure is more than revenue,
we say government has a fiscal deficit.
If the government incurs a deficit it will have to borrow
from local or foreign banks or increase taxes to pay for the
extra spending. The other option for government is to spend
less; this can be done by reducing the number of persons it
employs or the salaries it pays to them, or by reducing the
amount it spends on purchasing materials and services.
If the deficit continues, it means that at some point government
may not be able to meet pension payments, repay its debt or
pay salaries on time; it may also mean that roads cannot be
maintained and subsequently become filled with potholes, schools
may not receive new supplies of books or desks, and hospitals
may have to go without certain drugs. In any such circumstances,
we the citizens will suffer. With late salaries, we will not
be able to pay our own loans to the banks, our vehicles fall
apart on the bad roads and the hospitals will not be able
to help us when we become sick.
If this situation persists, we say that the government’s
fiscal operations are unsustainable. The state can no longer
live beyond its limits, spending more than it collects. Some
“belt-tightening” has to take place! National
efforts must be made to stabilise the economy in order to
prevent further contraction.
An Unsustainable Deficit
A deficit is not necessarily bad. As individuals we incur
deficits when we obtain a loan to acquire assets such as a
home. Without incurring this deficit we would not have adequate
savings for this and other major expenditures that allow us
to fulfil our expectations for better lives. However if we
need a loan to pay for everyday expenses such as our utilities,
food and the like, then this would indicate that we have an
unsustainable deficit. This is when the deficit becomes problematic.
Similarly in the case of governments, a deficit may be a necessary
pre-condition to provide for certain capital expenditures
such as the construction of schools, roads and other key assets
critical to the infrastructure development of the country
and in turn the development of the people. However the problem
arises when governments require loans to meet day-to-day expenses
(current expenses) such as the public sector wage bill.
It was Alexander Hamilton who wrote, “A national debt,
if it be not excessive, would be for us a national treasure.”
The key word here is excessive. Excessive debt, whether at
the individual or government level, can lead to instability.
Stabilisation
Stabilisation refers to steps taken to reduce a deficit and
move the government budget into a surplus. This as to be done
by either lowering public spending or increasing revenue through
higher taxation. The immediate objective of stabilisation
would be to ensure that the state lives within its budgetary
limits. Since taxes are normally the most important revenue
source for government, it is likely that new taxes or higher
tax rates would be introduced during the stabilisation period.
But it is not realistic to believe that deficits can be eliminated
simply by increasing taxes. A permanent reduction in the fiscal
deficit must also come from a decline in the level of public
spending.
Government will have to prioritise its spending; it will
have to decide which road, school or police station can be
built in one year and what can be left for another year. Of
course these are hard decisions. But stabilisation would ensure
sustained economic growth and improved standards of living
for the population. These efforts need not be imposed by international
institutions like the IMF or World Bank but can be done through
national attempts. The success of this process is not solely
the responsibility of the government, but of all citizens
(civil servants, private sector employees, the self-employed
and unemployed). Through public hearings and education campaigns
the general public will understand that these issues affect
the country in much the same way that they affect the household.
As a household, once you have set your priorities right and
brought your spending in line with your income, you should
strive to manage your money to the point where your income
exceeds your expenses. And you are able to save for future
large items such as a car or house. In the same way, the government
must stabilise then prudently manage the monies of the country,
so that it can reach the stage where it is able to invest
in projects that can generate employment for all citizens.
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Understanding
Stabilisation