Election Economic Misconceptions (4) Government is Different

The government has a balancing role in the economy. When the economic situation gets tough, a household needs to cut back on its expenditure and reduce its debt. When sales decline, a business needs to cut back its expenditure to match.

The government is different from households and businesses. When the economy is sluggish, the government needs to increase expenditure to compensate for the households and businesses that are cutting back. If the government cuts its expenditure at the same time as households and businesses, it will exacerbate the economic situation. The employees who lose their jobs will stop spending, and the businesses they purchase from will lose sales. They will need to cut their expenditure to compensate, and the economic downturn will deteriorate.

In a robust economy, spending goes round and round. If the government stops spending when the economy deteriorates, the economic situation will be made worse.

The other way that a government is different is that it gets most of what it spends back. If it spends more money on wages and salaries, the employees pay income tax, which means more than 30 percent of what they receive goes back to the government, even before they spend it. When they spend the remainder, they pay GST on the goods and services that they buy, which sends more of it back to the government.

But it does not stop there, because money circulates around the economy. The businesses that they have bought from pay wages and salaries to their employees. Some of this goes back to the government in income tax. And what is spent is charged GST. As the money circulates around the economy several times, the government gets back more and more of the initial spending in tax.