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The Politics of Tax and Spend3

Updated on March 22, 2014

What are we trying to do?

Commerce and industry are the wealth generators of our country. In some countries agriculture is the main wealth generator. How do we use taxation and spending to help the economy?

We can work hard to build infrastructure, whether it be railways roads or airports. The Republican Party in America originally came together to campaign for improved infrastructure, to help agriculture and commerce and industry. President Eisenhower built the Interstate highway system, an investment that has paid for itself many times over.

The US government for many years had a government funded outreach system of agriculture education for farmers, helping sometimes poorly educated farmers to improve their farming techniques.

Can we achieve more with our limited public money by giving subsidies to private companies to build infrastructure instead, so that the infrastructure is built with mainly private money?

The British Labour Government Private Finance Initiative allowed Labour to commission huge amounts of building all over the country, using private sector money rather than public money. Alas it is now time to pay the rent, and the British state will end up spending huge amounts on renting buildings we could have built ourselves and actually own.

We can give tax breaks to “green” or new industries. We can tax petrol users more heavily.

Often we need a combination of carrot and stick to achieve our ends. The Construction Industry Levy Board mentioned in the first article is a good example.

Raising child benefit can make it less expensive to have children, and even profitable. If we wish to grow our population, that is one way to do it. A cheaper way may be to allow foreigners to immigrate. When Australia wished to grow its population after World War 2 Australia offered very cheap fares to help British people to immigrate..

If we believe that science and engineering are the way forward, we have to invest in our schools and universities so that they have the laboratories workshops and machines to teach people on – and we will have to subsidise the teaching because teaching science and engineering is much more expensive than Arts subjects.

The Keynesian argument that spending is the way out of recession seems to be broadly right. As a practical point, a construction worker in work is generally not receiving benefit and is paying tax and national insurance – and he is creating a capital asset. The same man unemployed is not paying tax and national insurance. He is receiving benefits. He is creating nothing. For not much more than it costs to keep him idle we can have something of value from him.

Local authorities used to have an important role employing people who were at a disadvantage in the labour market because of poor education, borderline low intelligence, or poor social skills. Working, they had pride in themselves and they did contribute to society. Now many of these folk are laid off contributing nothing. One has to ask whether there is any saving to the overall public purse.

Healthy Public Finances

The health of the public finances is closely related to the performance of the economy. If unemployment is low, and tax income is high, the public finances should be good. If unemployment is high, and tax income is reduced, the public finances will be bad. It's not rocket science.

A doctor can deal with a patient’s raging temperature by dunking the patient in cold water repeatedly. One would question whether this was the best treatment. The cons and neo-cons often look like the demented doctor!

The Opportunity

The mix between collecting taxes and the spending of the taxes raised gives every government the opportunity to try to move the country in the direction it wishes.

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    • Charles James profile image
      Author

      Charles James 7 years ago from Yorkshire, UK

      wba108 - do not fret. I am a hardened politician and also a lawyer so I can defend almost anything.

      I recognise that governments can be incompetent whatever their political colours. The purpose of this article was to discuss how governments can use public expenditure for the public good.

      I realise I did not answer your first question - whether there is a link between the health of the public finances and economic performance? A bad government can wreck the economy by raising taxes to the point where they hurt the economy. A world recession can wreck the public finances even of a reasonably competent government. Generally a strong economy permits but does not guarantee good public finances. A weak economy cannot do other than damage the public finances.

    • wba108@yahoo.com profile image

      wba108@yahoo.com 7 years ago from upstate, NY

      I'm sorry I wasn't aware of this sir. I'm quite quite sure you can eloquently defend your position

    • Charles James profile image
      Author

      Charles James 7 years ago from Yorkshire, UK

      I am a socialist myself. I try to be intellectually honest. Effective government spending can have enormously good consequences. Poor spending -just throwing money at a problem- can not only not work, it can have negative effects.

    • wba108@yahoo.com profile image

      wba108@yahoo.com 7 years ago from upstate, NY

      Good point about being a purist because the way things are of course are often not the way we think they ought to be! A good example of this are the beliefs of both libertarians and socialists, each of which can be dangerously idealistic!

    • Charles James profile image
      Author

      Charles James 7 years ago from Yorkshire, UK

      A purist would say that the less government does, the less likely the government is to damage the economy.

      I was describing in the article attempts by Government to steer the economy in certain directions. Some of these attempts fail. Examples are the British groundnuts scheme, Quebec Airport, and a road in Brazil that was designed to allow access from a poor area of Brazil to a big city. Apparently once the road was built the poor area depopulated as all the residents went to the big city for work. Roads and bridges and and determined efforts to spread the internet or mobile phone coverage can be enormously positive. Subsidising training and investment can be enormously positive. Good drug and substance rehabilitation schemes or health promotion campaigns can produce very good returns.

      You are right that the consequences on the economy of a scheme are not always fair or ideal or as intended.

    • wba108@yahoo.com profile image

      wba108@yahoo.com 7 years ago from upstate, NY

      Great insights into how actually government works! My question is if the health of public finance the cause or the effect of economic performance? Another words is the health of public finances a symptom of private sector performance and not the cause.

      Another follow up question to this is that can we really know the entire effect that government intervention on private sector performance? Are we seeing the big picture or just viewing a small part of private sector response? For instance giving subsidies to corporations may increase output in a particular industry in the short term but what is its effect on the overall industry? What if subsidies are helping one sector of industry while damaging another? What if smaller competitors are not receiving subsidies, won't this damage the overall competitiveness of the industry thus raising prices and lowering demand?

      Or what about the overall effect that an activist government has on the private sector? Many companies and investors choose not to enter a particular industry because of the risk of arbitrary government interference, giving a great advantage to a competitor or suddenly making their product unprofitable through a government program?

    • Charles James profile image
      Author

      Charles James 7 years ago from Yorkshire, UK

      Thank you for your comment.

      One of the best ways to help small business is to have a healthy economy.

      I agree with you that temporary "makework" schemes are weak - but if the country ends up with a capital asset at the end of it it is better than paying the same people to be idle.

    • American Romance profile image

      American Romance 7 years ago from America

      The problem with creating temporary jobs is the cost! and the fact those jobs are TEMPORARY! America is spending something like 400 thousand per average temporary job! A private business can do it cheaper and with longer return! The only way to get the economy going is to help small business, yes that would be the wealthy to all you ideolog liberals! Learn from history! and remember freedom and less government always helps the economy!

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