As an individual or a business, if you have too much debt, the obvious thing is to stop spending so much. If you are a country it is rather different. For many countries the public sector makes up a significant part of the economy – up to 50%, or more.
If the government cuts spending, it not only reduces the amount of cash in circulation, it also cuts tax revenue. Less income tax, less business tax and so on. Cutting spending can tip a country that is on the edge into a downward spiral.
We all agree that you have to cut the deficit: massive debt and huge interest payments are not desirable or sustainable. But cutting spending is not necessarily the right way.
The best way to reduce the deficit is to increase tax revenues. And the best way to increase tax revenues is to reduce taxes – specifically, taxes to business. Less cost and fewer barriers to business means more businesses; more businesses mean more profits; more jobs mean more tax revenue.
If the government is going to cut spending, it should cut spending on imports, not internally.
There is another anomaly in our system. Wealthy and experienced investors know that they make far more money, more quickly and more reliably by ‘betting’ on markets than they do by investing in enterprise. The tax system needs to recognise this by offering tax incentives to investment in real business that create value and employment, and tax disincentives to market gambling that creates instability.
You might think this sounds far more politically palatable than spending cuts, and you’d be right. So why are so many of the governments that are in trouble cutting spending rather than incentivising investment? It shows that, in most situations, logic is no match for tradition and culture, even among relatively bright people.
And that is precisely the point of leadership – having the courage and communication to move people beyond their previous limitations. It is easy to recognise the best path to take. What takes courage is to speak up against the flow of tradition and culture and suggest an alternative.
We urgently need to move business and government beyond tradition and culture so that we can solve the significant challenges we are facing. To do that, we need a new generation of brilliant and authentic leaders.