Newspaper article China Post

Increase Permanent Income to Guarantee Nation's Solvency

Newspaper article China Post

Increase Permanent Income to Guarantee Nation's Solvency

Article excerpt

Premier Sean Chen warned Wednesday that a string of voluntary budget cuts - mainly PR spending - by everyone from low-level government officials all the way up to the president may ultimately have a negative impact on the economy, citing the famous theory of Keynes - the paradox of thrift.

In an economic downturn, people lose jobs and have less money. Consumption decreases, thereby hurting the economy further. The so-called paradox of thrift is that the increase of individual savings - i.e. decrease of spending - during a recession will reduce the economy's total savings because of reduced output.

The solution proposed by Keynes is that during a recession a government should apply an expansionary fiscal policy to increase the aggregate demand and create job opportunities, prompting people to spend.

Although the voluntary budget cuts will definitely reduce government spending and decrease aggregate demand, Chen's statement is still somehow missing the point.

First of all, in terms of public policy discussion, the premier should make the public understand the meaning of cuts to PR spending, i.e. the function and role of the PR spending being cut, and whether these government officials can still perform their duties under tighter budgets, instead of emphasizing the side effects.

As for the economic influence, Chen may have forgotten the very reason that the government has to cut its spending. The most urgent issue is that the amount of government debt has reached a point that it must be dealt with. The premier is right that decreasing spending may not help to boost the local economy, which has not yet returned to a satisfactory level, but the government cannot afford to delay action over its bulging expenditures.

Since government spending is bound to be cut despite the economic downturn, for the sake of the economy the government should cut projects that have a lesser impact on the economy. Government projects with long-term effects and the Cabinet's projects to save the economy should be carried out as planned. If the voluntary budget cuts initiated by government officials of all levels can be listed into this category, the government should indeed think twice about making the cuts. …

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