The Monster's Budget

The Budget reminds me of the Bob Marley song:

Here comes the con-man,
Coming with his con-plan…

Mint has this brief on the key features of the Budget, and these facts stand out:

=> The Plan and Non Plan expenditures in BE 2010-11 are estimated at Rs3,73,092 crore and Rs7,35,657 crore respectively.

=> The “labour army” idea of the Mahatma Gandhi National Rural Employment Guarantee Scheme gets Rs40,100 crore

=> Allocation for road transport increased from Rs17,520 crore to Rs19,894 crore.

=> Net market borrowing of the Government in 2010-11 would be of the order of Rs3,45,010 crore.

In this post, let me focus on the borrowing.

Now, all this borrowing is obviously to fund consumption. So this is “capital consumption” – another step towards de-civilization.

Further, the interest that will be paid on these loans will come from taxation, so the creditors are being guaranteed returns that will we squeezed out from the rest of us. The creditors are, in effect, partners of The State and are being given a safe haven for their capital – safe from market competition – at the expense of the rest of the citizenry.

This is what is meant by “perpetual irredeemable debt.” This is why I recommend that such debts should be entirely repudiated in an ideal scenario.

Allow me to quote Ludwig von Mises on this, from Chapter XII of Human Action: A Treatise on Economics, a chapter on “The Sphere of Economic Calculation,” from the section titled “The Root of the Stabilization Idea.” PDF here, see pages 223-228.

The problem assumed much greater importance when governments initiated their policies of long-term irredeemable and perpetual loans. The state, this new deity of the dawning age of statolatry, this eternal and superhuman institution beyond the reach of earthly frailties, offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable income secure against all vicissitudes. It opened a way to free the individual from the necessity of risking and acquiring his wealth and his income anew each day in the capitalist market. He who invested his funds in bonds issued by the government and its subdivisions was no longer subject to the inescapable laws of the market and to the sovereignty of the consumers. He was no longer under the necessity of investing his funds in such a way that they would best serve the wants and needs of the consumers. He was secure, he was safeguarded against the dangers of the competitive market in which losses are the penalty of inefficiency; the eternal state had taken him under its wing and guaranteed him the undisturbed enjoyment of his funds. Henceforth his income no longer stemmed from the process of supplying the wants of the consumers in the best possible way, but from the taxes levied by the state’s apparatus of compulsion and coercion. He was no longer a servant of his fellow citizens, subject to their sovereignty; he was a partner of the government which ruled the people and exacted tribute from them. What the government paid as interest was less than the market offered. But this difference was far outweighed by the unquestionable solvency of the debtor, the state whose revenue did not depend on satisfying the public, but on insisting on the payment of taxes.

Mises goes on to show how the investor in government bonds is only fooling himself, and how the government, in turn, is trying to fool everyone: the “con-plan.”

Now, the irredeemable perpetual public debt presupposes the stability of purchasing power. Although the state and its compulsion may be eternal, the interest paid on the public debt could be eternal only if based on a standard of unchanging value. In this form the investor who for security’s sake shuns the market, entrepreneurship, and investment in free enterprise and prefers government bonds is faced again with the problem of the changeability of all human affairs. He discovers that in the frame of a market society there is no room left for wealth not dependent upon the market. His endeavors to find an inexhaustible source of income fail.

There are in this world no such things as stability and security and no human endeavors are powerful enough to bring them about. There is in the social system of the market society no other means of acquiring wealth and of preserving it than successful service to the consumers. The state is, of course, in a position to exact payments from its subjects and to borrow funds. However, even the most ruthless government in the long run is not able to defy the laws determining human life and action. If the government uses the sums borrowed for investment in those lines in which they best serve the wants of the consumers, and if it succeeds in these entrepreneurial activities in free and equal competition with all private entrepreneurs, it is in the same position as any other businessman; it can pay interest because it has made surpluses. But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract. In asking taxes for such payments the government makes the citizens answerable for money squandered in the past. The taxes paid are not compensated by any present service rendered by the government’s apparatus. The government pays interest on capital which has been consumed and no longer exists. The treasury is burdened with the unfortunate results of past policies.

So, there we have it, from The Master himself. Our Total Chacha State is squandering Capital. And bondholders should be viewed as people on their side, not ours.

A good budget should contain no borrowing, even in times of war (as Mises makes clear in the same section quoted above, so study the entire section). The government should spend its legitimate tax revenues on its legitimate activities – and that should be that. Hence, a minimalist government, as prescribed by classical liberalism, is the best, the ideal. This maximalist Total Chacha State is a horrible, ugly monstrosity. This Budget proves it.