If the government pays citizens who are not working, and refunds businesses who employ people who have nothing to do, this is not transferring wealth. For no wealth has been created. So where is the money coming from? It is not coming from taxes. Our taxes have already been spent. In fact, our governments always spend more than they tax; that is what deficit budgets are. Just when we thought the government would balance the budget and produce a surplus, they are spending without limit. Money they don`t have. So where is it coming from?
Wealth derives from productive work. We specialize in what we are good at and exchange the product of our labours with strangers. Strangers who likewise are specializing in what they are good at. Nothing new here. Adam Smith articulated it in 1776. If we do not work and we do not trade, then we create no wealth to distribute. So where is the money coming from?
Our government is printing it. This is not a new phenomenon. It is not a reaction to a pandemic. Our Central Bankers and their Professional Economists have been promoting this theory for years. Fundamentally, their theory is that if you print money and give it to citizens who have not earned it then they will go out and buy things that they otherwise could not afford. The economy then thrives as businesses make the products that are being consumed. The theory has always appealed to politicians who cannot resist promising benefits to their constituents that exceed the total they are prepared to tax. But that does not make it right. It does not make the theory sound. You cannot create prosperity by printing money.
The fact is the principal and the interest on the COVID-19 debt will have to be repaid out of future taxation. The obvious way to do this is to increase the rate of tax. We could forego the planned reductions to corporate and personal tax rates, or we could increase the rate of GST from 10% to 12.5% or 15%.
Alternatively, we could increase the productivity of our economy. We could work smarter to create more wealth. The government could energise this by creating laws and regulations which promote wealth-creating behaviours and eliminating laws and regulations which inhibit them. Here are some suggestions.
Reduce the costs for employers to create and maintain jobs.
Help new projects get underway quickly.
Facilitate the supply of cheap, reliable energy.
Make it easier for industries – particularly telecommunication, education and health care - to innovate and provide their products and services more efficiently.
Cease granting favours to special interest groups.
But perhaps the most important thing we need to do is to get the control of supply of money out of the hands of governments and central banks.
If we did these things, then we could raise the extra tax from the extra wealth created. This would be preferable to the austerity required to raise the same tax from depleted levels of activity.
In summary, when we get to the other side of the bridge – to use our Prime Minister`s terminology – then we will need to foster a thriving free market economy. Otherwise we shall condemn the next generation to poverty.