Taking Our Economy For Granted

23/09/2009

I’ve been thinking about a couple of issues regarding our economy for quite some time now, but it was only until Marja Heikkinen-Jarnola’s column that I decided to blog about them. Heikkinen-Jarnola is a controller at the Ministry of Transport and Communications. I’ll leave the other issue for a new blog post so I won’t bore everyone to death here.

The column had a very simple point that she is doing a doctoral thesis on as well. She argues that governments’ books should be kept so that they follow the same accounting rules as corporations do. She argues that if Finland would be put to follow the same accounting rules -our country would have to declare for bankruptcy. I’m not surprised.

The thinking behind all this is that you have to balance your expenses to your income, just as companies have to. Well, not every year but if companies decide to neglect this simple rule for long enough – they’re forced out of business. Governments accounting rules are different – there are no bigger organisations that govern the ways their books are kept (roughly put).

The shocking fact is that according to Heikkinen-Jarnola’s study, would Finland have followed corporate accounting rules, Finland would have had only one positive year (in term of profits) between the years 1999 – 2008. These have been very successful years for Finland, not counting the dotcom bubble years 2001 and 2002. These figures exclude the sales of government owned corporations and dividents from government organisations. Looking at our economy from this perspective – we’re constantly running a slight deficit in terms of national income. Not a very positive thing in the end.

The government’s role with regard to the economy is to keep the annual budget balanced. That is at least how I believe many see it. If someone would introduce a CEO to me whose job is to keep the company’s budget balanced, I’d think there’s got to be something wrong with the business – why aren’t they trying to grow or create a profit?

To keep the budget balanced, if there is a possibility of deficit (like there is this year), governments take debt. Who pays the debt? The taxpayers naturally. In a way, each of us is a shareholder in a corporation called Finland and we’re not very active in running our company. This year will accrue each shareholder of Finland a future liability of approximately 2600 euros (Finland takes around 13 billion euros of debt this year to balance its budget).

Update: Just to clarify – I’m totally for Heikkinen-Jarnola’s initiative. I’m a big supporter of running governments more as large corporations.

There are 2 comments in this article:

  1. 28/09/2009Jon Martin say:

    I think there’s another way to look at this. The role of government is neither to balance the budget or create a surplus but to serve the needs of the population as best it can. To do that it has to weigh up several factors, one of which is what level of expenditure is necessary and prudent.

    The argument being made here is that because the government in general fails to balance the budget, it is acting irresponsibly or sub-optimally. That’s not necessarily true. If the rate of general economic growth exceeds the growth in state debt, the debt to gdp ratio actually decreases. That doesn’t make it good, but it does make it sustainable – and importantly, it means that our children will pay a smaller proportion of their income to service the debt than we do now.

    The debt to GDP ratio decreased in Finland in the decade up until the economic crisis. Now it’s up to about 60%, which isn’t great, but it’s low by international standards. Cutting expenditure would be painful too, so that is the reality of the situation the government is in.

  2. 6/10/2009HE say:

    I think there’s another way to look at this. The role of government is neither to balance the budget or create a surplus but to serve the needs of the population as best it can. To do that it has to weigh up several factors, one of which is what level of expenditure is necessary and prudent.

    The argument being made here is that because the government in general fails to balance the budget, it is acting irresponsibly or sub-optimally. That’s not necessarily true. If the rate of general economic growth exceeds the growth in state debt, the debt to gdp ratio actually decreases. That doesn’t make it good, but it does make it sustainable – and importantly, it means that our children will pay a smaller proportion of their income to service the debt than we do now.

    The debt to GDP ratio decreased in Finland in the decade up until the economic crisis. Now it’s up to about 60%, which isn’t great, but it’s low by international standards. Cutting expenditure would be painful too, so that is the reality of the situation the government is in.

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