Last week, the Penang Chief Minister announced the State Government’s 2016 Budget in the prestigious State Assembly. He proudly claimed that under his administration since the year 2008, they have managed to achieve an annual surplus for seven years consecutively. Politically, the idea is to show the people how effective and efficient the State Government has been running Penang. Surplus or earnings in the financial papers of the Government has a strong political appeal, because the people in general dislike the idea of “deficits” or “debt”. Nobody likes the feeling of being in debt.
But what does the economist and professionals says about government financial surpluses, or maybe what does the history shows about it?
Let us begin with a simple understanding of budgets and the economy. The definition of a budget surplus is a situation where the income is more than the expenditure. The term is commonly used in governments and businesses; while the same situation that happens to individuals means “savings”. The opposite of surplus; budget deficit is a status of financial health in which the expenditure is more than the income.
To make us understand about the impacts of budget surpluses or deficits easier, let us put the calculations in a simpler way. At the level of the economy in general, when one sector spends more than its income, another necessarily spends less than its income for the simple reason that, total spending equals to total income. Let us, explain the economy into three sectors to determine the implications of government surpluses for the other sectors. First, we consolidate all levels of the government as “Public” sector; while we combine households and businesses as “Private” sector. To balance it, we must also add a foreign sector, which means every other part of the world who took part in our economy. Generally, the spending of all three sectors combined must equal the income received by the three sectors. It is clear that if the public sector is spending less than its income; which means it is running a surplus, this must imply that at least one other sector is spending more than its income; which means running a deficit.
In short, if a Government is having a budget surplus means that the private sector, which includes the businesses and household, is facing a budget deficit.
Now using the logic, how does a Government achieve its financial surplus? Usually a Government has to increase taxes, collect more fees, and find more ways to generate revenue or cut spending to ensure a surplus.
When the Government takes steps to increase taxes or cut spending to meet a budget surplus, it could have an adverse effect on the rate of economic growth; unless when the economy is booming which isn’t happening now.
Some argued that a budget surplus allows us to save for the future. They believed that a surplus can be ‘saved’ for the future, or ‘used’ to finance tax cuts or spending increases. But that is probably only beneficial to make the financial papers look good. We have to remember that a surplus exists only as a deduction from private sector’s income.
History has shown that when a Government meets budget surpluses, it causes downfall of the economy as well with the collapse of household savings rate, the increase of household debts.
During the 1920’s in the US, also called as the Roaring Twenties, the economy is booming. The US Federal Government achieves budget surpluses but in 1929, the Great Depression happened.
President Bill Clinton was known for his budget balance when he was running the country. He brought the Government’s deficit to a surplus in his administration. But in the middle of his tenure, the figures started falling around the year 2001 and as the history wrote, US suffered from a recession in the early millennium.
Not far away from us in the East Asia, Japan ran a budget surplus in the year right before its economy went into terminal decline in the 90’s.
Our nation’s history has proven itself as well, in the year 1996-1997, our economy was booming and the Government achieved a budget surplus. We have also known that at the end of 1997, we suffered from the economic crisis.
What worries me is that Penang Government has met a budget surplus for seven consecutive years; what is really coming ahead of us? There have already been some movements in the manufacturing sector, Penang main shapers of the economy.
An accountant may probably make the financial papers looks good, balanced and presentable. But it takes more vision and leadership to manage an economy.
We may not be able to avoid the downturn in an economic cycle; but the Government has to take actions to minimise the damage.
This article has been published in Mandarin in Kwong Wah Yit Poh dated 20th November 2015.