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Always Spend Wisely ....

European governments face a problem. They have borrowed to finance fiscal deficits during the recession and now they must repay their debts. Taxes will rise and public spending will fall. None of this is popular with voters, but it must be done.

In this era of austerity there is much talk about "doing more with less". This is a worthy goal: who would be in favour of doing less with more? But the rhetoric of public spending cuts disguises an important distinction between the level of spending and the quality of spending.

For economists "savings" are the excess of income over consumption, or deferred consumption. We save now so we can consume later. The balance between current consumption and future consumption depends upon our circumstances: in times of plenty it is prudent to save, in times of shortage in makes sense to consume. It was ever so.

The idea that we should try to "get more for our money" is somewhat different; it suggests that we spend wisely, ensuring that we do not overpay for products and services. It is hard to argue against the idea that we should optimise the value we secure for each pound, euro or dollar spent.

So, two rather different ideas: one proposes that we consider the balance between present consumption versus future consumption, the other proposes that we should always spend wisely, making the best of the resources we have.

Governments should always spend wisely, but today they have much less to spend. As we enter several lean years of public spending we can be sure the politicians will tell us that they are doing more with less. Very good. But when the fat years come back, we should continue to insist that we get good value for our money.

© Mark Hannam 2010