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Cheating Politicians Balancing BudgetsWe have explained in multiple occasions that politicians need to spend in order to stay in power. Unfortunately for them and since the 2008 debacle, people are looking far closely at how their tax money is spent. The fetish du jour is "budget balancing" because there is this idiotic notion that balanced budgets will lead to lower deficits, which is downright stupid (see The Cure For Deficits). This is in term based on the laughable principle of "fiscal responsibility" (see The Fiscal Responsibility Delusion). This new trend is bad for politicians. A balanced budged cannot be used for vote buying because it is fully allocated, i.e. there is no more money left for "other" things. Thus "something has to be done". Enter the new age of "capital budgeting".

Capital budgeting for governments was an idiotic idea that everybody ignored until they realize it was good for politicians. The main goal behind this concept is that government spending should be split into two: operational and capital. The operational side were the day to day operations that should not be financed with debt. The capital side on the other hand, should, because said projects would benefit generations to come. It was deemed "unfair" for one generation to pay for everything that subsequent generations would use. Think about roads, bridges, civic centers, hospitals, schools, and so on. All capital good. Well… sort of.

Because then we have the tiny issue that capital good in the private sector are there to produce profits through the manufacturing of consumer goods and services. Thus, the justification to have "capital budgets" is meaningful. In governments, on the other hand, capital goods produce nothing. As a matter of fact, typically they only increase operational expenses. Think facility maintenance, salaries, consumable items, etc. Thus, to term "capital budget" in a government environment makes no sense whatsoever. It was for this reason that was mainly ignored. Yet… it does have a very appealing property; an excellent public image! And this is something that politicians cannot afford to waste.

And so, what's the story all about?

Simple. Many political jurisdictions have "balanced budget" laws and regulations in place thus preventing politicians from spending. But, and there is always a but, said regulations do not include "capital spending". Ta-daaa!!!

See the connection now?

The way this wonderful concept of government "capital budgeting" works is that it is a "bad" thing to accumulate debts for "operational purposes" but it is a "good" thing to accumulate debts for "capital" purposes.

In this manner it is possible to "balance the budget" without actually balance the budget. Can you imagine an accountant in any company creating a financial report leaving out debt accumulated in the purchase of capital goods? If anybody would to do so, it would be categorized as fraud by the current so-called justice system.

- So, Joe, how are our finances doing?

- Great! Fantastic! We had a great year! Profits all around.

- Seriously?

- Yup!

- But what about all that debt we took from the banks to expand our sales division?

- Oh…that… well… that's "capital" expenditure and it does not count.

- ?????

See the "dilemma"? Yet, as governments operate in the land of perpetual moneyless bliss, they do not "concern themselves" with such nuances. But now they have gone a step further. They have simply started to re-label operational expenses as capital ones. For example:

- New employees are now "human capital"

- Travel expenses are "capital-related costs"

- Raises in salaries are now "capital-enhancement expenditures"

And so on. Get the picture?

And so through the magic of "capital budgeting" many governments have now achieved the Walhalla of a "balanced budget"…all the while their debts are skyrocketing. Something tells us that this wasn't the outcome people had in mind…

But not to worry, because the regulatory fix is here. Through new regulations we will make eeeeeeeverything better. Trust us.

The last chapter in this saga is downright ridiculous. It is, of course, more regulations. Let's create new regulations specifying what politicians may or may not spend on or how they may spend on… or…or…or. Utterly pointless. People want free, politicians know it and they will give it to voters…even if "free" means sentencing future generations to financial oblivion. The very latest paragraph in the last chapter states that government debts must be a fixed percentage of…wait for it…GDP!!!! Yesss!!!! We can already see politicians de-corking bottles of Dom Perignon (vintage 2000). GDP!!! Perfect!!!

Why perfect?

You see dear reader; the GDP indicates what the GDP wants to indicate which is what politicians want the GDP to indicate (see GDP Keynessians Vodoo Economics). Tying government debt to GDP is like tying debt to a fart in a very windy and very flat land. It only seems to stink.

And so we come to the end of this little diatribe. Even with all these new rules and regulations, it is business as usual for politicians. Money will never stop flowing until people finally evolve and realize it is a scam and nothing more.

In ultimate analysis it is an act of faith. Believe or not. We prefer history, statistics and mathematics. Somehow it seems more…uh…we don't know… accurate? But who are we to interfere with free will… after all, we are not politicians!

Note: please see the Glossary if you are unfamiliar with certain words.

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