You are here:

Economics/personal vs. nationbal budget

Advertisement


Question
Why is it logical to use different techniques to resolve a personal or national debt?  Researching history reveals that government spending has been the expedient course to reverse an economic downturn.   Of course, for a personal debt dilemma some sort of austerity is the beneficial course. I am far from an economist. However, I would love to understand the economics of this.   I also believe that being a citizen comes with, along with all the wonderful benefits, a responsibility to be informed.  Thank you so much for all the wonderful work you do.

In Friendship,
Judy

Answer
Hello Judy,

while I think that it is a logical first step to think of the national budget in terms of the personal budget, because that is what we know most about, I think it fails to see the major differences between the two.

Unlike your personal budget, the state has two easy options to increase its revenue: printing money and taxation. Therefore, for a state, a budget problem is usually less of a problem than it would be for a family who overspends.

Printing money may lead to inflation (depending on the growth of the economy) and taxation may stall economic growth (although that may also depend on the type and amount of taxes).
Austerity on the other hand may lead to a stalling of economic growth or to investments not being made.

I agree with you that austerity is an option, but for a state it is only one option and there is nothing to suggest that it should be the first or main or default option over the other options.

In my personal view, the problem seems to be more with what to spend the money on. At least in a democracy, ALL expenses that the government has have been authorized by Congress which was in term elected by the people. One would think that they also think about how to finance these things. It always leaves me astonished to see members of Congress rile against taxes or revenue which would pay programs that they themselves had approved or put into law before.
Even the citizens who argue for austerity will almost always retreat when I would then suggest that something will be cut that they benefit from, whether it's Social Security or home mortgage deductions or DOD contracts.

Finally, there is one other point in which a country's budget is different from a personal budget. The state may wish to invest in something which will only yield rewards later (like space exploration, interstate highways, national parks, science, universities). There is an argument to be made for financing these long-term project through debt (at least as long as the interest rates are low) and therefore have future taxpayers pay for these projects. It would have been arbitrary if only the taxpayers in the year the decision for the interstate highway system was made would have to pay for all the highways, when clearly the benefit will remain for decades.

To summarize, I think you see that there are different ideas and possibilities about how a country should be financed, but you can also see that all of these ideas are legitimate and the discussion about them should not imply that one of them is automatically better than the other one. Most countries will therefore opt for a mixed model in which they employ all three ways of financing their spending.

Andreas Moser
http://andreasmoser.wordpress.com/category/economics/  

Economics

All Answers


Answers by Expert:


Ask Experts

Volunteer


Andreas Moser

Expertise

Specialization in Development and Economics, Political Economics, Philosophy of Economics, and Law & Economics.

Experience

Currently studying Development & Economics at LSE in London. I am writing about Economics, especially in connection with Politics, Law and Philosophy. Business experience as owner of a law firm and several years on the board of an international corporation.

Publications
Articles about economics, law, politics ad philosophy on www.andreasmoser.wordpress.com

Education/Credentials
2000: Law Degree, University of Regensburg, Germany 2010: BSc Development & Economics, London School of Economics, UK (ongoing) 2010: MA Philosophy, Open University, UK (ongoing)

©2016 About.com. All rights reserved.