Cover Budget deficits

For thirty years, the Dutch government has used a trick to hide the true extent of the budget deficit. The author of this open letter doesn’t have enough insight on the politics of other countries to assess whether they have used the same trick.

Successive Dutch governments have applied cutbacks for 30 years. But, just like businesses, politicians never considered using the proceeds of those cuts to close the budget deficit. So, the €6 billion that Rutte II had to cut back, was, in reality, a deficit of €200 million per year over the last 30 years. This was not the government’s budget deficit, but probably that of the Tweede Kamer (the Dutch Congress). The government’s budget deficit is much bigger.

The Dutch government started to redirect money flows in the middle of the 1980s, but cutbacks only commenced from the mid-1990s. When cash flows are redirected, an organization is promised a grant that, ultimately, works out at 5% less. To cut down, the organization must pay back 5%. This seems to be the same. But, in reality, there is a world of difference.

In 1986, a nursing home for senior citizens was pledged a 10 million guilders grant per year, but only received 9.5 million guilders. As a result, 5% of the employees had to be dismissed and they protested in the Hague.

In 2014 and 2015, a homecare organization received €1 million per year twice, but had to repay €50,000 twice in April 2015. But, halfway through the grant period, an organization no longer has €100,000 left, as all the money has been budgeted for salaries. The only way an organization can come up with €100,000 is by laying off all employees and to close its doors. This leaves employees believing the organization went bankrupt through bad management, and they don’t protest. The next year, the government no longer needs to pay out the €1 million grant. So, in reality, the cut is twenty times larger than the citizens believe.

In October 2017, Rutte III has used the general ledger account for profit and loss to plug a €7 billion deficit. Bearing in mind that the Dutch government’s budget deficit is about twenty times the size, this will be about €140 billion.

Company losses arise because products cannot be sold. However, the government doesn’t sell anything. So, what caused their budget deficits?

Before bank money became available for companies and citizens to pay their taxes, around 1985, it was impossible to count large amounts of money securely. It didn’t matter how much an official earned, if you told them there was about a hundred billion dollars in cash in a vault and you asked them to count it, they would be very tempted to take some of that money home with them.

Before 1985, governments never counted their money. They blindly trusted their accounts. If mistakes were made, officials were justly sent home at the end of the year without pay.

To solve this problem, governments invented budget financing. With budget financing, an organization acts as if an administrative task is a product which is paid for on completion. For every hour an official works, about $1000 is booked to the budget. In this way, not only is there sufficient budget to cover the official’s salary but also to cover organizational and housing costs.

However, the method introduced a big problem. When a scheduled task isn’t done, the associated budget is not entered into the system. Since it is impossible to book that expected income that has not been received, a budget deficit will emerge, and the government will cut back. Predictably, retrenched officials do not carry out scheduled tasks. So the associated budget is not entered into the accounting, and the budget deficit continues to grow.

The government is not rich enough to cover its budget deficit at once. But the longer it continues with budget financing and cut-backs, the bigger the budget deficit will become.

To solve this dilemma, the government can best consider the budget deficit as ‘a government debt to its future self ‘. It can thus enter and settle the budget deficit as a liability in the accounts, the same way it handles other debts.

Since everybody started to use bank money, it has become possible for banks to count large amounts of money in a secure way. To make it possible to abolish budget financing, every department should get a private bank account, and accounting should be left to the bank.

Hourly wages also cause losses or budget deficits with administrative work. Officials should be paid a fixed amount per day/week/month, based on education.

Budget financing is used not only by the government. Large companies that issue share capital also often use this in their administration. Since 1990, subsidized institutions in the Netherlands are required to use it. The same solution applies to them.

Phantom money

The Roman Catholic Church doesn’t use budget financing but has, throughout its history,  encountered the problem that is not possible to safely count the proceeds of the collection. To prevent theft, the proceeds of the collection are stored in a treasure chest or safe storage immediately after the church service.

To carry out its activities without suddenly running out of money, for 2000 years already, the Roman Catholic Church has based its accounting on a conservative estimate of the proceeds from the collection. This leads to the issue of phantom money. Phantom money is money that was received in the collection but cannot be used because, according to the accounts, it doesn’t exist.

There is an approximate correlation between the size of the municipality, the proceeds of the collection, and the cost of maintaining the church building and staff costs. But because the Church assumes a conservative estimate of the proceeds of the collection in its accounts, it regularly experiences a budget deficit and has to cut back. When cutting back at the end of a year, money is left over that should be used to close the deficit. But that doesn’t happen. Instead, this money is sent to Rome.

The Roman Catholic Church could solve these problems by giving each municipality its own bank account and leaving the accounting to the bank.

To prevent budget deficits, Church employees should be paid a fixed salary per day/week/month.

Since phantom money arises because an organization doesn’t count its money, it is quite possible that governments and subsidized institutions also hold phantom money. It is quite possible that governments in Europe and America had hundreds of billions of dollars in phantom money in 1985. It is to be hoped that European authorities deposited that money in bank accounts before the emergence of the euro.

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