Facing competition, businesses in the private sector must be efficient and profitable to survive in the market place. A similar principle is applicable to the business of government in the public sector; although, it does not operate to make profit and faces zero competition, it has to generate enough revenue to meet its expenditure. Otherwise, the need to borrow money to manage the deficit arises, leading to the problem of debt. On both sides of the Atlantic, nations are suffering from debt; this is particularly acute for some of the nations in the Euro zone.
The government answer to the national debt problem has been to impose higher levels of taxation, and introduce new taxes where possible, coupled with a reduction in government expenditure. However, the problem is, taxes reduce disposable income, thus a decrease in consumer spending, and reducing government spending has the same effect; the end result is a contraction of the economy as the demand for goods and services falls. Since, the bulk of the tax revenue comes from the private sector, a contraction in the economy will result in tax revenue falling, offsetting the initial rise in tax revenue acquired through higher tax.
This UK economy is slowing down and heading towards contraction, this is supported by the recent figures; economic growth (GDP) in the UK was 0.2% in the second quarter, down from 0.5% in the previous quarter. Other nations are also slowing down through imposing a similar policy to reduce the debt.
Therefore, instead of raising taxes, if the revenue could be generated from another source, the economic slow down leading to economic contraction could be avoided; this could be achieved through economic growth, coupled with a tight fiscal policy that ensures that government money is not squandered, inefficient departments made leaner, and cutbacks on peripheral spending.
The classical route to stimulate growth is to make a demand-stimulating Keynesian investment by the government. However, that does not always work in the long term; it leads to inflation, causing a contraction in the economy because consumer spending power is reduced by higher prices. Another alternative route to economic growth is to redistribute wealth. It is better to have 10 individual with assets of 100,000 dollars each, instead of one millionaire, because concentration of wealth in the hands of the few means spending power is reduced; an individual can only do so much, whereas redistributing wealth to a greater number of the population leads to greater levels of demand.
Hence, the government needs to pursue a policy that leads to circulation of wealth rather than accumulation in the hands of the few; for example monopolies and oligopoly should be discouraged and most of all the absurd trickle-down theory, which suggests the wealth of the rich, will somehow trickle down to the rest. There are many societies you find extremely wealthy few with the vast majority having very little; the rich hoard their wealth and use it to generate more wealth for themselves.
Take the recent example of the petrol price increase, which resembles an oligopolistic market as it is dominated by a small number of companies. No surprise, Chevron, Shell, Mobil and BP are reporting a higher level of income from the increase in oil prices. The prices are not going up due to rising cost of production or a sudden rise in demand, or the war in Libya because the over all oil supply is not affected, there is plenty of spare capacity in the market.
If war is the cause of the price rise, but that price does not fall when the conflicts come to an end, the price has been moving steadily in one direction, because these oil companies collectively have a monopoly in the market. They are making more money in times of recession, because petrol is a necessity. These companies are contributing to the recession through higher prices, as the masses have less money to spend. A fall in petrol price would be a fantastic injection across the economy; this can be achieved by opening up this market to free competition.
Therefore, instead of raising taxes, lower the profit of these large corporations, so the masses have more money in their pocket to spend and stimulate growth; it would be good for everyone in the long-term including those oil companies. This is just one small example; a general approach to create better wealth circulation would set the economy on fire.
Yamin Zakaria (email@example.com)
Published on 1/08/2011