3.2.2 To Change the Amount of Taxation
Often it is thought that a reduction in the amount of taxation on earnings and purchases can stimulate the demand for produce and its consumption, thereby encouraging more employment. However this view is only part of the whole picture, because it simultaneously reduces the Government income and decreases the public expenditure elsewhere. In a reciprocal manner, the effect of greater taxation on personal income and consumption is that the demand for these goods is reduced. But instead of the sales income mostly going to the production sector, more of it would pass through the Government to its various ministries and newly installed employment sources. Thus for either kind of change, the distribution of the work output is modified but the total sum used for payment of its wages has not. Comparing both of these opposing policies, the altered demand for goods must be balanced against the modified supply of social services and public utilities. Hence, neither policy can stimulate (nor retard) the current overall rate of macro-economic activity; all that it achieves is a re-distribution of what each participant does.
3.2.3 To Reduce the Governmental Expenditure
The outlay of public money to the Government ministries is not a waste. Apart from tax-collection, these departments and offices provide a variety of necessary services, such as those for education, public health and various emergencies, without which the average citizen would not manage properly. He/she would need to pay more for the service than what the national (social) insurance covers. As implied by the above description, a new frugal approach on the part of Government does not change the total amount of money flowing around the system. It has about the same overall effect as that obtained when reducing the taxes and the progress of the national economy as a whole is no different. It is only the distribution of activity within certain of its sectors, which is affected.
3.2.4 To Deliberately Inflate the Currency
The national economy may be regulated in more than one way by this action. During normal times when only small changes to the rate of progress of the system are required, they are obtained by adjusting the National Deficit. Then some money either is withdrawn or is made available, the choice normally following the degree to which the national budget has been met. In years of prosperity, larger amounts of taxes are collected and there is a budget-surplus. Then this extra money can be withdrawn from circulation, with the cooperation of the National Bank who store (or destroy) the bank-notes, having reduced the National Deficit by selling back to the Government some bonds or Treasury Bills. However when there is reduced economic activity and the lower amount of tax collected results in a failure to meet the budget, the deficit is made up by the issue of new bonds or Treasury Bills in exchange for the stored money (or by printing new bank-notes). Here its influence enables the banks to increase their amount of credit for investment, thereby encouraging industry to be more productive. Normally these budget surpluses and deficits are a relatively small proportion of the gross domestic product (under 5% of the total) and when taken over many years, the average of the various resulting inflating and deflating effects is small.
However, when a slump prevails, the printing and distribution of larger amounts of new money also can be used for the courser regulation of the macro-economy. Then the Government directly spends this money to stimulate the level of macro-economic activity, without intending to introduce any later deflation to counter the effects. (Even after conditions improve, this opposing action would be likely to cause another slump.) There is reluctance to use this monetary instrument, due to the scale of the correction being much greater than when adjustments to the budget are being made, as described above. The effect of the inflation on the system no longer remains small and it is a dishonest way for the Government to temporally obtain greater spending-power and lower debt.
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