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Spending (a Government Finance Issue)


Introduction

In general, in order to spend money, someone needs to have money or to be able to get money. An individual or someone within a family usually works at a job that pays them for their skills and labor. For many people, income also comes from investments. The money that is earned can then be spent on acquiring various goods and services. Various businesses and organizations get the money that they spend on goods and service from the earnings from their sales of the goods they produce and the services they provide, from investments and from donations. Our various governments get the money that they spend on buying goods and services, and on providing us with various services and benefits from various taxes, levies, fees and fines.

What people, businesses, organizations and governments can spend is generally limited by their income or revenue stream. In many cases, money can be borrowed to support current spending, but only with the understanding that this money must be paid back with interest. Lenders will generally not lend money unless they believe the borrower will have enough future income or revenue to take care of their future spending needs and to pay off any loan obligations.

In some cases, people, organizations and governments do not have enough money and cannot borrow enough to cover their spending and loan payments. When this happens, they may have to declare bankruptcy so that they can spread out or reduce what they owe. This may help in the short term, but can make it harder and more expensive for them to borrow money in the future. Therefore, it is always best to plan ahead and to try to limit our spending based on what income or revenue we can reasonably expect to receive.

Individuals and Families

Most individuals and families need to spend most of their income on things like food, clothing, housing and transportation. Any money that is left over from what is spent on the necessities, can be spent on other things like entertainment or luxuries, or can be saved or invested. People who are wealthy can spend a larger share of their income on luxury items and can invest more.

Each of us has our own priorities when it comes to what we want out of life. This can affect what we want to spend our money on and how much money we will need in order to have the lifestyle we want. This in turn can influence the type and amount of work we do, and in turn how much we can earn. People who strive to earn more money may be able to earn and spend more money, but they may end up having less free time to enjoy the things they could spend their money on. Of course, even when people end up earning the same amount of money they may spend it on very different things.

For some people, having a bigger or nicer home is important, so they may spend more of their money on housing and less money on other things. Some people may want to do a lot of traveling, so they may need to cut back on other things in order to save up the money they need for their trips. Other people may want to retire early, so they may need to cut back on everything so they will be able to save and to invest for the future.

In order to get the most out of our money, we all need to prioritize and to watch what we spend. We may need to buy certain necessities, but we may be able to get a better deal or to get something without certain extras. For instance, if someone needs a car, but does not need a bigger or newer car that is loaded with extras, then this person could save some money by buying a smaller or older base model car, and then use the savings to buy something that was a higher priority for him or her. For non-necessities, we can always choose whether or not we want to buy something depending on our priorities.

Most individuals and families would like to spend the money they earn on what is important to them. Unfortunately, there are a few things that can get in the way of this. Some people either do not know what they want or are not very good at budgeting for what they want. In these cases, people can get some appropriate help to figure out what they want and to put together an appropriate plan to get what they want.

Even when people do save for what they want, an unexpected emergency may come up that could eat away at their savings. In cases like these, it would have been nice to have put away some extra emergency savings and to have purchased the right kinds and amounts of insurance. Doing either or both of these things will reduce the amount of money currently available to spend, but would be a big help in the event of an emergency.

Another portion of our spending that we do not have much real say in is how our tax money is being spent. We do get to vote for our representatives and some initiatives that are put on the ballot, but it is very likely that much of this money is not being spent the way each of us would like it to be spent. Although there are some things that the government needs to do, because these things could be done better by a government, there are a lot of things that could be better handled by private organizations where individuals could decide whether or not it was important for them to participate. I will talk more about this later.

Businesses and Organizations

In some ways, spending by businesses and organizations is similar to the spending done by individuals and families, but usually on a much bigger scale and with some important differences. The most important difference concerns their spending priorities. Since the ultimate goal of most businesses is to make money for their investors, a high priority may be placed on growing the business or on providing a good dividend. On the other hand, many organizations are in business for a specific purpose like helping the poor or promoting some cause, so they would prioritize their spending accordingly.

In order to make money for their investors, most businesses will prioritize their spending so that they can earn the best return on their investors’ money. If spending money on something will improve efficiency or productivity to the point where the money to be spent would be recouped in an acceptable time frame, then a business would probably spend the money. Of course, a business would want to evaluate all the different spending options to see which ones would give them the best return in order to maximize their profits.

In many instances, businesses and organizations will spend some of their money in ways that many of their investors or contributors do not approve of. When someone does not like the way a business or organization is spending their money, they can try to change its spending behavior. Bigger investors and contributors may have a big enough influence on these businesses and organizations in order to do this. Of course, people always have the option to move their money to a difference business or organization that spends its money the way they want.

Governments

Governments can do some things for us better or cheaper than we can do them for ourselves. The job of protecting us from our enemies and criminals is probably the best example of this. If our federal government did not maintain a military, the burden of protecting us from foreign invasion would fall on those people living near our borders. If our governments did not maintain police forces, courts and prisons, then everyone would need to provide their own protection, would be left to meter out their own justice, and would be at the mercy of everyone else’s justice.

In addition, many people want our governments to provide much more for us than just some level of protection. Of course, anything that the government does will cost money, which must come from someplace. In general, this money comes from a combination of taxes, levies, fees and fines. Eventually, one way or another, to some varying degree, these will all come out of our pockets. Even when we just consider our sales, use and income taxes, anything that we buy ends up costing more. Of course, without the protections offered by our governments, most things would probably end up costing even more.

Few people, if any, really like paying taxes. The issue comes down to a question of whether or not we feel that the things our governments are doing for us are worth what we are paying in taxes. This can be an extremely difficult thing to judge. Our money is mixed in with everyone else’s money and then spent on such a large diversity of different things that it is difficult to identify what our money is being spent on. This is all complicated by the fact that few people would agree on what our governments really need to be doing, on how much they should be spending on what they are doing or on what priorities they should be setting for what they are doing.

Before deciding on what our governments should do and how much they need to collect in taxes, there are a number of big questions that must be asked. These would include such things as the following.

  • What things are better done by our Federal, State and Local governments and what things are better left up to individuals?
  • How much money is needed by our governments in order to effectively do each of the things they need to do?
  • What relative priorities should we place on the things that our governments should be doing?
  • What types of taxes, levies, fees and fines should our governments collect?
  • How much should each of us pay?
  • How will paying these taxes affect us and our economy?
  • What should we do when our governments cannot collect enough taxes?

The following are a few general guidelines that we can use to help answer these questions.

  • If a government needs to provide a service or to do a project, it is best to move it to the most local government possible so that people will have more control over how these services and projects are administered and how much is spent on each.
  • If possible, it is always best to allow individuals to make their own spending decisions, so if private businesses can effectively provide the service, then people should be allowed to decide whether or not to get this service from one of these businesses.
  • It is always best for a government to get the money for a program or service from the people and businesses that cause the need for it and not to force others to pay for it.
  • It is better to have people and businesses pay the appropriate taxes, levies, fees and fines so they pay the true cost for the portion of the services they get and/or the amount of harm they do than to give them financial incentives to do the right thing.

If we use the above guidelines, we can take a look at a few spending examples here to see what changes we should make, and we will take a look at some others in the following subsections.

Local Services and Projects

Currently, the federal and state governments spend a lot of money on local services and projects like roads, bridges, community centers, police, schools and other local projects. Local communities will need to compete with other communities in order to get some of this money. Often, a community may not be able to get any money for their top priorities, since the federal or state government may not consider them a high enough priority to spend any money on. Instead, the community may end up trying to get money for one or more of their lower priority projects, because they feel it is better to get some money for what they can do rather than no money at all.

Instead of local communities spending their time and money trying to get money back from the federal and state governments, they should be spending their own revenues on their higher priority local services and projects. This means shifting the collection of the appropriate tax revenues back to the local governments from the federal and state governments. In conjunction with the other economic changes in the previous and upcoming subsections this will give each local community a better shot at creating its own prosperity.

Government Subsidies

Our federal and state governments currently subsidize a number of industries and programs, and in turn, their products. These subsidies artificially reduce the cost of these products, which allows more of them to be sold than there would have been at a higher price. People who do not buy these products and people who are low volume buyers are therefore, through their tax dollars, subsiding people who buy a lot of these products.

Even if everyone bought similar amounts of these subsidized products, they would end up costing us more through higher taxes than they would have at higher unsubsidized prices. This is a byproduct of the rules of supply and demand. At a lower subsidized price, people will buy more of these products, even though the true cost must include the higher taxes needed to provide the subsidy. If we eliminate this hidden cost, people will adjust their purchases of these products to reflect their true cost.

National Flood Insurance

Another example of a government program that uses tax money from everyone to subsidize a few is the government’s national flood insurance program. People who build in areas at high risk of flooding would need to pay very high premiums to get flood insurance from private insurance companies, if they could get it at all. Instead of paying high private insurance rates or simply not building their homes in high risk areas, people can get inexpensive subsidized flood insurance from the government.

Each year the government pays out far more in claims than it collects in premiums. The extra money to pay these claims comes from our tax money, so we end up paying for the high risk behaviors of others. The solution is quite simple; raise the premiums over some reasonable amount of time until they reflect the true cost of insuring these homes against flooding. For new homes or homes rebuild after a flood, immediately start charging the higher premiums. People can them decide whether to pay the higher premiums or build someplace safer, and the rest of us are not burdened with the higher taxes that would be needed to cover their flood loses.

Economic Growth

With our current economic system, there is a continuous push towards economic growth or growing the economy. Increased economic activity is seen as a way to create jobs for the unemployed and to create wealth. There are numerous problems with the way in which we doing this. One important problem is that in order to increase economic activity, people need to spend more, which increases the wealth of the wealthy, but decreases the wealth of the people who are overspending. In addition, when people do not have any extra money to spend, especially when the economy is already doing badly, they cannot help increase economic activity.

Instead of growing the economy, we need to concentrate our efforts on doing what we can to make it easier for people to make their lives better. Most people care about the happiness, safety and stability of their lives and the lives of their families, their friends and their neighbors, and not about helping the rich become wealthier. If we give people more control over their local economy and finances, they will be able to spend and to save based on their own priorities, and have a better chance of being happy and prosperous.

Next Section

Taxes - Making paying our taxes simplier and fairer.

Last Updated:
Thursday, December 28, 2017
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