Exercise Caution With Stimulus Packages

IN THE wake of the worldwide financial crisis that has led to a global recession, governments have decided it is necessary (or perhaps fashionable) to announce fiscal stimulus packages. The world's biggest economies, i.e., the United States, Europe, Japan and China, have all announced their own packages. While the details may differ, the essentials of packages remain. Government spending is increased and taxes are cut.

While it is every government's responsibility to soften the blow of the meltdown, I strongly urge that they use fiscal packages with caution. Governments need to pay for their spending. In an ideal world, government funding would come from tax collections. Governments collect a surplus in good years and spend it during the bad years.

We live in a world that is far from ideal. The United States and Europe have consistently run budget deficients - even in the boom years. In the absence of sufficient tax collections, governments have resorted to borrowing. As it stands, the United States owes more than US$10.6 trillion in debt.

Whether personal or governmental, debt is always reduced by one of two ways. They are either written off (usually due to bankruptcy), or paid off with future income. Hence, borrowing out of a recession is actually eating into a country's future income. Every dollar borrowed will have to be repaid, with interest, in future. As it stands, the United States government is already borrowing to repay past debts. This recession will take the country further into the red.

While fiscal expansion would do the countries good, caution should be exercised when working them out. Governments need to take a broader perspective and remember that debt will eat into the next generation's income and wealth.