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The best way to spend a budget surplus

NEWS agency Reuters recently sent out a highly interesting news report which was hardly taken note of in South Africa.

According to the report, Germany posted a record-breaking budget surplus of €21bn in the first six months of this year. Barring an unlikely crash, one may assume that the surplus for the entire year will be in the vicinity of €40bn.

This is even better than the surplus of €18bn produced in the whole of 2014. And what makes it all the more remarkable is the fact that German Finance Minister Wolfgang Schäuble planned a balanced budget this year – in other words, a situation where the state’s income is about the same as its expenditure.

To give you an indication of the staggering extent of the surplus, it is bigger than Iceland’s entire gross national product in 2014.

The question of budget surpluses or deficits is one of the central elements in the broad economic discourse in the world. Following the 20th-century economist John Maynard Keynes, many governments have accepted permanent deficits, run up year after year, in the expectation that economic growth will increase the state’s income and enable governments to pay off their debts.

This, of course, rests on the premise that the deficit money is invested in matters like infrastructure, lower taxes and the like – all measures designed to stimulate the economy and thus promote state income.

In real life, this works only to a limited extent. Deficits do not always translate into adequate stimulation measures and often do not result in increased state income.

In practice, this means that state debts increase every year, to the extent that there is almost no possibility that the money will ever be paid back. To all intents and purposes, those states are bankrupt although nobody acknowledges it for fear that it would cause the house of cards to come tumbling down.

For instance, as these words were written, America’s state debt was about 18% more than its entire annual gross national product, and increasing every second. The days of president Bill Cilnton, who produced a balanced budget in the 1990s, appear to be forever gone.

In Europe, there is a clear dividing line between the north with its frugal, Protestant culture and the Catholic, free-spending south.

Can the state ever spend its way out of crisis?

The “spenders” (if one may call them that for want of a better word) opine that the way to tackle an economic crisis like the one the world is presently recuperating from, is to spend your way out of it. The “savers”, on the other hand, say that you cannot indefinitely go on spending more than you earn; sooner or later the edifice will come crashing down around you.

Of course, Keynes was not entirely wrong. There is nothing amiss with a temporary budget deficit, provided that you invest the borrowed money wisely in measures which will really stimulate the economy and let the money flow back into state coffers so that the debt may be paid off.

But this cannot go on too long.

What, then, do you do with a surplus? According to the Reuters report, Schäuble and Merkel are resisting pressure to invest the money. They want to show the free spenders in southern Europe that they practise the frugality they preached in the wrangling about the Greek crisis.

One can, of course, be more Catholic than the Pope. According to reports, Germany’s infrastructure is crumbling. A third of all railway bridges date from times when the kaiser still ruled the country - in other words, before 1914. Some are so run-down that traffic has to be severely restricted.

In this river-rich country, bridges are extremely important. Together with the famous Autobahnen and railways, they form the main arteries and chokepoints of the economy.

Members of the German parliament last year were told that 1 148 bridges need to be replaced, and about 7 000 need urgent renovation. This would cost an extra €30bn, Rüdiger Grube, president of the Deutsche Bahn, told Members of Parliament.

Safely tucked into a drawer

Worse still, the quality daily newspaper Die Welt recently reported that about €118bn is needed to restore public roads and buildings, while €7.2bn per year is needed to fix the public transport infrastructure.

These are gigantic sums which dwarf the €40bn surplus the government is planning to tuck away in a drawer this year.

At this moment, things are still going rather well in Germany. However, as Die Welt’s economic analyst, Michael Gassmann, puts it: “Germany is today harvesting the fruits of earlier investment and is sowing too little. We are living off the substance instead of our earnings.”

This is a timely warning: while running up endless deficits may drive a country over the precipice of economic disaster, sitting on you surpluses instead of investing wisely may be just as bad.

In the temple of Apollo in Delphi in the Greece of antiquity, there was a plaque saying, very simply: “Moderation in everything.”

This also applies to surpluses and deficits.

* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.


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