Austerity

I suspect this is going to be one of those blog posts that everyone is going to hate – either for being stupidly left wing, stupidly right wing, or stating the obvious.

I find that austerity is a concept that is often talked about, but usually with a goal of being divisive and winning an argument, rather than achieving the best outcome.  Since one of the goals of this blog is to give me an opportunity to engage with these kinds of tricky topics and work out what I think, here goes…

Austerity usually relates to government spending / borrowing, but I wanted to start with the simpler question of an individual’s borrowing.

I borrow (or reduce savings) when the money I earn is less than the money I spend or invest.   For me, it seems rational to borrow for two reasons:

  1. when investing in things with a high enough rate of return
  2. to get me through temporary times where my earnings don’t cover my spending.

It isn’t always obvious when these criteria are met.  For example, I don’t know what rate of return I’ll get on any investment, and I won’t ever know for sure what my future income will be.  But at least if I knew these weren’t satisfied, I should look to avoid borrowing.

I take a pretty similar view when it comes to government borrowing.  Yes, I know that governments do have greater ability than individuals when it comes to borrowing, and that borrowing often is the right approach when we are are in faced with short term drops in income (say in a recession).  But I don’t believe it is responsible to borrow forever – even when we borrow to invest, we should have a reasonable view that it should earn us enough in future to be able to pay off the debt and be ahead.

I suspect most fiscal conservatives will agree with what I’ve said so far, and probably even most governments would agree.

Unfortunately, I don’t feel we’re doing this in how we assess our social spending / investing – on things like health, education, our safety net, etc.  I’d like us to think about them based on whether they are worthwhile and sensible, and if so find a way to make them sustainable, through boom and bust.   Instead, in the bad years we’ve been going through, this is the spending we’re seeing being cut, and I would say to levels that I don’t believe are healthy or sensible.

I suspect the government believe that they should (and will be able to) grow spending on these areas to more sustainable levels when the economy is stronger – but if that’s the case, these are the very things that it would be rational to be borrowing to fund now.

One thought on “Austerity

  1. supasiti

    Thanks for opening a discussion. This topic tends to bring out the ideological battle.

    From what I understand from reading your post, you assume that some level of spendings on education, health and safety net is a good thing and both sides generally agree on. Without going into the usefulness of those spendings (I think they are very beneficial if it is spent wisely), I think the Government should behave to counter the ebbs and flows of economic cycle. So, in one sense, it should act like the spender of last resort.

    This lines up with the investing values too. Right now, interest rates around the world are at the lowest in decades, so from investing point of view, it is worth borrowing cash from ultra-long-term bonds (like 30-year or 50-year bonds) and use it to build basic infrastructures in setting up for the next spurt of growth. It has a benefit of stimulating economy through increasing spending, and also satisfying high demand for risk-free investments, while supporting the social need.

    The problem with this is that when the good times come, and they do, governments rarely cut spendings (so that they have a budget surplus) And that leads to accumulation of debt. To me, I think it is ok to cut (or slow down) the spendings on public goods during the boom, but rather concentrate on those who really need them. But it is hard politically to do it.

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