Future Spending Commitments

Readers Question.  Why might the government ignore future spending commitments when making current spending decisions.

The UK government like many others is facing an ageing population. Therefore, in the long term spending on health care, education is likely to rise. Therefore, ideally we would be planning for future spending. But, governments have been borrowing in short term for various reasons.

Dislike of Tax increases. There is little political gain for making sacrificies in the short term to prepare for tax liabilities in the future. It is human nature to put off unpleasant consequences for later.

Expansionary Fiscal Policy. In a recession there is a good argument for increasing government spending to offset the rise in private sector saving and decline in consumption. This increase in spending and government borrowing will in theory lead to higher economic growth and overcome the recession quicker. If the stimulus package avoids a prolonged downturn the government will benefit from higher future tax receipts.

Borrowing as a % of GDP. If the economy grows by 2.5% a year then in theory tax receipts will increase by 2.5% a year even if tax rates stay the same. Therefore, if pension liabilities are forecast to rise, the government can borrow more but keep government borrowing at the same % of GDP and therefore, interest payments will stay same % of GDP.

Borrowing for Investment. Spending in infrastructure could lead to higher rates of growth and boost productivity. Therefore, this leads to higher economic growth in the long term and therefore increase future tax receipts.