The Business of Government by Dr Alan Mitton

Yesterday was a very important day for Chancellor Gordon Brown, who may become the United Kingdoms next Prime Minister. It was his 11^th Annual Budget Speech.

Useful links

• Calculate how the budget will affect you click here
• Key points from the UK Budget click here
• Q&A: What the Budget means to you click here
• View from the Economist

The Budget is a statement of the governments planned income and expenditure for the forthcoming year.

The Budget reminds me that the business of government is costly. Providing us with social services, healthcare, education, and defence and other things is not cheap. It all has to be financed. So, who pays for it? Well the simple answer is that we do. We are taxed. The bulk of government income arises from tax on our income. Then we are taxed again on what we spend through value added tax (VAT) and other excise taxes. At present the standard rate of VAT in Britain is 17.5 per cent. Not bad for the government, eh! I wonder how many businesses out there are making after tax profits of 17.5 per cent. Yes, businesses even pay tax on their profits to the government.

The business of government is a great business to be in. Each year you just announce an increase in tax and then wait for the coffers to fill up! Of course you can take action to reduce your tax burden. ‘How can I pay less tax?’ is a question I am frequently asked by my students and private clients. I have saved them enormous sums of money in the past. It is not rocket science.

But, the business of government is not so easy. Difficult choices have to be made for example, how much should we spend on social services (the largest item), defence, health, education and the like. Greater spending on nuclear submarines may limit how much more the government spends on housing, new schools and hospitals. The choices are political in all aspects but have far reaching social, legal, economic, technological and environmental consequences.

People complain if you are not spending enough, or spending too much, on any one area.

Damned if you do; damned if you don’t.

As an economist I am reminded of the concept of ‘opportunity cost’, this is the cost forgone of the next best alternative. The opportunity cost of developing the Trident defense package, for instance, is what could have been bought if that money had been spent elsewhere (for example, on hospitals).

Governments use the budget as a major economic tool. If the economy is depressed they can stimulate it, and certain business sectors, through their income and expenditure. If the economy is growing too fast they may spend less or increase taxation. Sometimes they may go for a balanced budget, other times for a budget surplus. More frequently however, planned government expenditure is greater than planned income. People do not like to be taxed. In Britain, the shortfall consists of government borrowing through government bonds and treasury bills. These are managed by the debt management office. More bonds provide for greater liquidity in the bond market. The shortfall adds to the national debt. This has to be managed and repaid, at least in part, at some time in the future. But, this is in the long term, someone else’s problem! The business of staying in power is often short lived.

Dr Alan Mitton