Tuesday, October 21, 2008

Deficit Economics

In the current economic climate, no politician can honestly preach an upcoming budget surplus. The surpluses should have been huge for most of the last decade.

Economic growth, judging by the stock market, has mostly increased year upon year since the nineties. Stock market growth translates to income growth. More income means for governments to tax.

Currently, worldwide stock markets have decreased in the range of 20-40% depending on how you do your calculations. This means that instead of declaring big gains, people will be declaring income losses.

Losses means less income. Instead of a average capital gain boosting the average salary from say, $50,000 to $60,000. We're seeing the reverse, capital losses lowering average income from $50,000 to $40,000. (All figures are rough unchecked estimates)

With the average person paying income tax on 30% less income, the government generates much less from income taxes.

This spells big trouble for countries already posting big deficits. If your government was overspending during recent good times, how can it maintain that during the crunch.

The next US president is going to inherit a gutted and defunct economy. I don't envy them. Credit crunch, business stagnation, job losses, and dried up income tax revenues are on the horizon. I've blogged about the scary numbers before, and that was when the climate was sunny. Dark deficit days are here.

No comments: