Money to spend
28.11.2008
Ian McMaster
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Commenting on global business issues
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If the government suddenly gave you €500, what would you spend it on?
I asked a colleague this question yesterday, and her answer surprised me. I had expected her to say new clothes, new shoes, or a Christmas present for her daughter. Instead, she said: "I wouldn't spend it. I'd save it."
This is what governments fear as they consider tax cuts. If people save any extra money instead of spending it, that won't help the economy. We looked at this problem on Wednesday in relation to Britain's cut in the standard rate of VAT, which comes into effect on Monday, 1 December.
This fear helps to explain why the German government is hesitating about cutting taxes, even though its relatively healthy public finances mean that it has more scope for a fiscal boost than Britain or the US.
Instead, the German government is thinking of giving its citizens a €500 voucher to spend. This was a front-page story in Handelsblatt, Germany's national financial daily, which is owned by the same company as Spotlight Verlag.
The government denies the plan, but senior sources say the idea is being considered for 2009 in case the economy hasn't recovered. (Interestingly, although consumer spending has been weak in Germany in recent years, it hasn't fallen over the past months. It is lower exports and rising imports that has caused Germany to go into recession.)
The voucher plan has a number of advantages. The vouchers are only valid if spent; they can't be saved. Those on low-incomes would benefit most. The vouchers would be valid in Germany only. And they could be tied to people spending some of their own money, too.
But there are also problems. How do you prevent the vouchers being spent on imports? How do you stop consumers from substituting the vouchers for money they would have spent anyway (and so, in effect, saving the vouchers)? Are the vouchers valid for online purchases?
What would I spend a €500 voucher on? A new computer? Maybe. Fifty more CDs? I shouldn't, but might. Tickets for football matches or concerts? Very tempting. A flight abroad? That's an idea.
In the end, unlike my female colleague, I decided I'd buy some winter clothes and shoes. The coming months will be very chilly indeed, I fear.
And you? Tell me in the comment section below what your spending plans would be.
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COMMENTS
Dear Mr McMaster,
If the €500 came as VAT-cut, I would definitely save it. Maybe I wouldn't even notice it. If it came as a voucher, I would still save parts of it by buying things I would have bought anyway. On the other hand I could imagine to spend it on leisure: relaxing at a spa, eating out at a restaurant, not mounting the winter wheels myself.
Best regards,
Uwe Kindsvogel
I would invest in the stock market because all the shares has sunk to the ground - in my opinion it's a good time to stock up with some shares. Change is comming!
It's amazing that anyone still believes spending money inside one country actually benefits that country more in the long-run. I would have thought that Frederic Bastiat and other economists had already debunked the myth that is protectionism and the economic devastation it wreaks upon its own citizens. It's time to move past this type of 18th-Century thinking. It is a global economy, and it doesn't matter where you spend the money. The best thing for any one country is the cheapest products possible for its own people, not to rape them of their own money in the name of some mythical "German" economy. Protectionism just leads to the exact opposite result.
The absurdest of absurd: getting a 500 Euro voucher from the same government that took the 500 Euros in taxes in the first place. Why do we always forget about this step in the economic chain? Before you even get the 500 Euros back, the government has already destroyed most of the tax money through its own inefficiency. We even have to pay bureaucrats with tax money to redistribute the money. Why not leave the money in the hands of the consumer? Or perhaps creating a new government program to fix the old government program that was put in place to create the old program will be a better idea? Unfortunately, the world will never be rid of busybody planners . . .