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EconoVision column
Cutting deficits is an art
Deficit cutting is a theme that confronts us every day and everywhere. In Italy, in Greece, in Great Britain, and also here in the Netherlands. Interestingly, the proposed austerity measures appear to be mainly a matter of ‘breaking down resistance’. Whereas economic growth often is associated with an undisciplined ‘grab for money as long as it is there’.
To spend les or not to spend less and how much, that seems to be the only question. A strategic underpinning of those economies seems lacking. Growing and contracting are almost like tidal movements, laying the foundation for a new phase. Both these movements require informed planning. Each change in terms of growth and contraction offers challenges and opportunities. In the process, through rigorous observation and analysis, weak spots can be eliminated and strong assets stimulated.
How do we normally deal with deficits? Think of this old parable. A village baker was facing a serious decline in income. He had to take steps in order to safeguard his business. The next day he put the following a notice on the window: as of today customers will buy half of the normal quality of the bread for half the price. His motive: I have to economize, otherwise my business will go down the drain. The baker’s business did not survive and within a week he had to close his shop for good.
Could this have been handled differently? The village baker may have announced the following: from now on, customers will buy a better quality bread at a lower price. In addition, he may have started to work harder than ever, convincing his customers that they got more value for their money. And today his bakery may have still been thriving.
Why is it that governments, when confronted with a deficit and having to introduce austerity packages, decide to cut the production of collective goods? One must assume that these goods are an essential output by the government. If overhead costs do not decline proportionally with budget cuts the efficiency will, on balance, decrease.
Christine Lagarde, the new boss of the IMF, stresses the importance of taking adequate steps in order to revive growth in the world economy. And more specifically, job creation should have priority over deficit reduction.
So, Governments, know Thyself, act wisely and listen carefully to what Christine Lagarde has to say and especially heed the story about the baker.
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