The federal budget is often compared to a family budget. but it is not that simple

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Well, the long-awaited federal budget is released next Tuesday.

It is likely to show a record deficit and describe spending on major projects to revive the economy.

But for most Australians it is considered a fairly dry document and can be difficult for people to understand.

Often, politicians and other commentators liken it to a family budget to keep things simple.

But is this a good comparison?

Not really.

It is true that for both scenarios, the budget is a document or structure used to organize expenses.

But, there are big differences.

“Often you will hear politicians talk about ‘we have to live within our means’, for example, and draw a direct comparison between the government budget and the household budget,” said Leonora Risse, economist at RMIT.

But the spending targets of governments and households are just not the same.

The purpose of a government’s budget is to help the whole economy, while a household budget mainly concerns his own financial situation.

“The government spends money and accumulates debt to recreate opportunities for works, develop GDP, create more business confidence in the future, and to to restore economy so that he has the capacity to repay that debt, ”said Dr Risse.

“It’s a very different scenario than households, where we go into debt because there is an item of consumption that we want to take advantage of and we just don’t have the income to pay for it.”

Let’s talk about spending more than we earn

So a budget deficit (like the one we will have next week) is another way of saying that the federal government will spend more than the revenues it receives.

His income comes mainly from taxes (like income tax, corporation tax and GST). So when more people are out of work, there is less money coming in.

But remember, the main purpose of the government’s budget is to help the economy and that is why they will be spending more than they will receive this year.

For households, however, our income comes from our salary or wages of the work we do, of our investments, or maybe from government benefits such as pension.

We are often warned not to spend more than what we earn because if we take on too much debt we cannot afford to pay back (debt collectors might come knocking on the door).

What about access to loans? Does the government just go to a bank like we do?

Nope.

When individuals or households want a loan, we usually go to the bank with our documents and prove that we have the income, credit history and assets to borrow money.

But the government has a lot more power to access debt, says Paramjit Kaur, a civil service economist who has worked on the last 10 budgets.

“The government has a lot of power to borrow and households have limited power. The government can print money if they need it, but households cannot,” she said.

Most governments don’t just go straight to the press to get more money – they go into the bond market to borrow money (which is like an IOU that they sell to investors).

“Investors will get a relatively low return compared to other financial investments, but government bonds are low risk. Thus, the Australian government generally has no problem raising this money through these borrowing facilities. “, explained Dr Risse.

So can the government just borrow as much as it wants?

Well, technically yes.

The government had a statutory debt ceiling but, since it was repealed a few years ago, it has only a ceiling self-imposed debt ceiling – Which one is currently $ 850 billion.

On the other hand, the government can increase this debt ceiling when it needs it, so this is hardly a constraint.

It’s a pretty different situation for households, says Nicki Hutley of Deloitte Access Economics.

“A household is limited by the income it has,” she said.

“So if I have some income, the bank will only lend me a limited amount for a credit card or mortgage.

“If I am the government, as long as people buy my bonds or if I choose to print money, I can, at least theoretically, continue to spend money for a while before it costs more. cost me never come home. perch.”

Why don’t we just get money from the magic money tree?

This is called printing money.

Technically, the government is not responsible for doing this.

It’s a job for Australia’s central bank – the Reserve Bank of Australia – which is independent from the government.

A raw chicken is seen in front of a large stack of bolivar notes, both on a yellow crate with a dark background.
In Venezuela in 2018, this raw chicken cost 14,600,000 bolivars (the equivalent of US $ 2.22).(

Reuters: Carlos Garcia Rawlins

)

And the reason the RBA is unwilling to print money (or release more money into the economy in some other way) is that a negative consequence of this can be inflation.

Take Venezuela as an example. You need a stack of cash just to pay for basic household items (like a chicken) because the country has the highest inflation rate in the world at 15,000 percent.

More physical money in the economy can weaken the purchasing power of that money – and we don’t want it!

Summarize

Both household and government budgets are about money management.

But our goals are very different. A government budget is really best described as a tool for managing the economy and has far fewer constraints than a household budget.

And a household budget is more about balancing our income and expenses.

So keep all of that in mind when you hear all the budget news next Tuesday.


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