The Budget Deficit – Constructive Debt

During this present economic crisis, there has been much controversy over the Government’s stimulus package as well as increased expenditure for infrastructure and public works programs for this nation. These measures have obviously created a huge billion dollar deficit which will eventually need to be paid off in future.

As these events unfold it is natural to become  concerned about this mounting debt . I myself am extremely risk averse and prefer to avoid any type of personal debt at all costs, instead having a surplus.  However I realise there are other personalities who are willing and comfortable to acquire a certain amount of debt,  especially if it can benefit other people,  and help to produce long term wealth and growth over time.   Hence after discussing these issues recently with a friend, I was reminded of the fact that in certain situations a certain amount of debt maybe necessary, in order to create and build wealth for the nation, especially in times of economic crisis. The following are some classic examples that can be found in everyday life,  where debt is sometimes necessary to build wealth.

1.  Businesses –  any business both large and small knows that usually a certain amount of debt in the form of business loans need to be taken out in order to get things started or to purchase important assets etc for the business.  Some savvy business people would tell you that at the initial stages, you have to spend money to make money. Without such initial spending,  nothing would happen to set the wheels in motion for the generation of future income.

If you look at any balance sheet you will usually find a certain figure for loans that still need to be paid off.  This is just a natural part of business.  There will also be a long list of expenditure items from the Profit and Loss Statement.  Again these items are essential to establish the business in the first place,  in order to generate income and profits for the future.  If these huge expenditures were not made,  these business owners would not be able to create the means to generate any income in the first place, in order to earn a living.  Instead they would still have zero wealth and no potential for growth in wealth and income.

In a sense what the present government is doing is similar.  Since they know the wealth of the country will be in jeopardy, on a national level and a personal level,  they realise that just like a new business,  they will need to take out a loan and undertake necessary expenditure,  in order to eventually establish a “business of operations” so that future income and job opportunities can be generated in abundant amounts for future generations.   This income can then eventually generate profits for the business owners own survival as well as for investment  back into the business to make it grow and hence employ more workers to expand it’s operations.

2.  Individuals – It can also be shown how debt is often necessary in order to produce wealth for an individual on a personal level.   Taking out a mortgage on a home can be a prime example.  It is only when this debt is created that an individual or couple can start building their wealth by gradually paying this off,  so that eventually they will own their own asset which could eventually increase in value during boom times.

This home aquired by an initial loan or the incurring of debt,  can later or even be immediately used as a form of income generation by renting out a room to a boarder or later renting out the whole house to another family.

If you read some wealth creation books many savvy businessman say that if they are in a place with very little money, what they do is start giving a good portion of it away to needy causes or needy people.  This is so, because even as a non christian,  they can still be aware of God’s universal law that when we give it will be given back to us in abundance.  It helps to generate a cycle where money will flow, instead of making it stagnate.  This is probably the principal applied to the stimulus packages.

3.  Property Investors –  It is also useful to realise that the building of a property portfolio usually involves taking out substantial loans (or going into a certain amount of debt) initially, in order to start taking ownership of a certain amount of property including land or a large buildings.  Without first going into this debt,  this process of wealth creation could not be instigated.  There is inevitably expenses which go along with maintaining or upgrading these buildings or properties.  However this is still a necessary process in building and growing the wealth and sustainability of an enterprise.

One could then argue that the money spent to “stimulate” the economy and handed out to pensioners was not money spent to purchase an asset of any sort.  However this expenditure was still probably instrumental in helping many businesses from going bankrupt straight away.  Instead it probably gave businesses more time before bankruptcy would have happened, to perhaps plan and re-strategise in order to find a way to stay afloat and survive during this economic crisis.

The greater amounts of spending in infrastructure and public works however, is a definite investment into the future which can reap long term benefits in the form of government revenues and jobs.  This will in turn enable  people to earn money to spend on the economy,  to increase business incomes and growth.

From this discussion,  it is evident that during certain times and in the process of wealth creation,  growth and survival,  it is often necessary to go into a certain amount of productive debt since this is necessary for the creation of future income.  This is proven in the case of running an ordinary business whether that be small or large or acquiring a family home through the means of a mortgage.

Perhaps this perspective can give a more positive outlook for what may initially seem to be meaningless or wasteful spending by the present government. 

It is also well to note that the budget deficit – has been caused by constructive spending for a good cause ie to

a)  Help the Poorer Members of society eg. pensioners through the stimulus packages

b)  Help Businesses stay afloat

c)  Help Schools to develop sound expertise and skilled labour for the future

d)  Help Hospitals,  so sick people can heal more quickly and continue to contribute in a meaningful way to the workforce

e)  Help to improve Public Transport facilities so more workers can get to work safely, comfortably and quickly so they can contribute to their place of work more efficiently and effectively. 

f)  Improvement in roads and rail can facilitate businesses to transport and distribute their goods & produce more efficiently and effectively to faciltate scales of production and hence profits.

All these factors are designed to help the economy run more efficiently and in due time , increase the wealth and economic growth of the nation.  The budget deficit has not been created from “destructive” debt which is built on selfishness ,  greed,  corruption,  fraud or increased incomes for politicians.

Therfore it is evident that there are two types of government debt:-

1.  Constructive Debt–  which ultimately helps individuals in society on a grass roots level in order to assist in alleviating human suffering.

2.  Destructive Debt – spent on luxuries that people don’t need or to satisfy ones own need for vanity, greed,  selfishness, corruption or keeping up with the Joneses.  On a national and a personal level this  type of debt should be avoided at all costs.

In conclusion,  it can be argued that the present government deficit would be classified as “Constructive Debt” since it’s primary purpose is to help alleviate human suffering on an individual, family and business level as well as activate the wheels of motion to create wealth and facilitate growth for the future economy.

Prima facie it sounds like good rhetoric to always have a “budget surplus” according to the national bank statement.   However it may not always be healthy, if there is a huge surplus, while many desperate needs in society are not being met.  For instance, it is not a “wealthy” attitude for an old man to have a huge surplus in his bank account,  and yet refuse to help his son buy food in desperate times, when this son is short of funds, due to the inability to find a job for a long period of time.  Also the large surplus of previous years was produced partly because of the minerals boom (which has little to do with government economic management),  and by selling off income producing government assets. Hence from a balance sheet viewpoint, this latter strategy, could be seen as a decrease in the future wealth of the enterprise.  Young people may also complain that they are the ones who will have to pay off the present debt in terms of higher taxes in the future.  However one could argue that it is still much better to have a job and pay a bit more tax,  then have no job at all. 

Luke 6:38 says ” Give and it will be given to you .  A good measure pressed down shaken together and running over,  will be poured into your lap. 

Let us pray that the money that has already spent will reap the rewards of future income and growth as planned, and that the Lord will multiply the results of these economic strategies to benefit the people who make up out nation as a whole.

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