Mastering fiscal policy is more of an art than a fail-safe science even for the best in the business; to be sure, governments have utilized gimmicks to try to balance their budgets for as long as time.
Fortunately, nine years after the nadir of the Great Recession, with 3.6% unemployment at a 50-year low, revenues mostly having recovered, many favorite gimmicks to obscure or avoid budget shortfalls are no longer as warranted or commonly employed.
Still, some public finance pitfalls to avoid include the following, namely:
- Balancing a budget with one-time/one-off fixes: Many states and cities must, by law, balance their budget each fiscal year; shifting costs ahead into future fiscal year(s) can help in the short-term, but creates a fiscal albatross in the medium- and longer-term and should be avoided to the extent possible. Similarly, one-off transfers are appealing and equally tempting, but should be avoided as well; eventually, the robbed account will need to be replenished, and interest payments exacerbate the problem.
- Obscuring or ignoring long-term budget consequences: It is tempting to privatize public goods for a one-time cash grab, but this ignores longer-term consequences; better to engage in profit revenue sharing, attract new business and associated development, and sustainable revenue streams instead.
- Squandering higher revenue in good times: Localities and states should not squander an uptick in tax revenue or business investment when the gravy train is humming along; better to save some of that cash when cyclical downturns inevitably arrive.
- Shortchanging pension funds: A habitual temptation is to reduce contributions and/or rob from pension funds; better to guarantee those funds and include a sliding, increasing scale of contributions over time; doing so also ensures that when employees are asked to sacrifice by, say, retiring later, they are more likely to do so. When needed, borrowing from – with a plan to expeditiously repay – pension funds is a sounder bet.
- Forecasting using rosy assumptions: Generally, this is unwise; better to stick to historical returns on investment, economic growth, debt financing, and related forecasts when promulgating current- and out-year revenue and expenditures; this will keep your locality out of trouble, on average.
- Safeguard your assets and don’t squander what you have: Pay attention to changes in the stock and bond markets and stay attuned to geopolitical events (e.g., the ongoing trade war with China, destabilization in Venezuela) to invest shrewdly and safely in funds that incorporate salient world events; you’ll be grateful you did!
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