Monday, April 6, 2009

A Penny Saved Is A Penny Earned

Following last week’s high court decision to allow the Federal Government to give taxpayers their own money back, cheques for up to $900 are now being delivered to their intended recipients. Much to the relief of those battlers who had already decided just what they would be doing with the money, the challenge by University Of New England Law expert Bryan Pape failed to convince the High Court to stop the payments. Now, the plans that people may have made can go ahead, whether it may have been for updating household appliances, taking a holiday, or even buying a big screen TV.

Of course, there will be some people who decide not to spend the money. Some will decide that the sensible thing to do is to reduce their debt, or to simply tuck the money away in their savings. Judging from the experience of the first round of stimulus spending last December, perhaps as many as half of the recipients might be tempted to save it rather than spend it. Given that the whole reason for handing out the money in the first place is to dump cash into the economy, some will undoubtedly see this as counterproductive. The question is, if the money isn’t spent, how does it help the economy or sustain jobs?

That is precisely the criticism which has been leveled by the opposition, who have labeled the cash hand out as wasteful and reckless, suggesting that it won’t do anything to save jobs. The Shadow Treasurer Joe Hockey has even gone so far as to indicate that should there be further such measures in the forthcoming Federal Budget the opposition may vote against them. While consistent with the opposition’s recent stance against what it depicts as profligacy, this is a politically driven position which ignores some fundamental realities.

First and foremost, if the Australian taxpayers who are receiving a refund of their own money in this current round of stimulus spending should choose to save the money rather than spend it, then good for them. Each Australian should be able to best decide for themselves what is the best use of their money. Some will indeed spend it, and that will help retailers and other businesses to benefit from the cash. But those who choose to save it are also doing the right thing. Each individual should make that decision based on his or her own circumstances, and for many people, putting the money aside or paying off some debt will make more sense than spending it.

The good news is that this is still good for the economy, no matter what Joe Hockey or anybody else says. Economic strength depends on many things, and one of them is good national savings, something that Australians haven’t been especially good at. But when it comes to the bug picture, any contribution to boosting savings and reducing debt is good for the nation’s overall balance sheet. It provides stability and security and brings closer the future time when people will feel more confident about spending.

We generally believe we are a wealthy nation, and it’s true. Thanks mainly to a plethora of minerals and other natural resources, we have enjoyed the benefits of wealth without having to recognize that the real seed of all wealth and prosperity is in retained earnings which are in turn reinvested in productive activity. Saving some or all of the bonus money increases wealth in the economy, as well as adds to the lending reserves of the banks where it is invested. Saving the money may mean there is less immediate benefit to the retail economy, but it is still good for the economy.

Ironically, even if every recipient went out and spent the bonus money, much of it will still wind up in savings somewhere. If I buy a digital TV, I might spend the whole $900. But the shop which sold me the TV will bank a profit from that sale, thus adding to the savings of the business. The salesman who sold me the item will spend some of his commission on his groceries, but if he is a prudent manager of his own financial affairs he will bank a portion of it into his savings. The shareholders in the company which owns the TV shop will bank their dividends. The grocer who sold the food to the TV salesman will bank his profits… and so on. At every point, as the money changes hands over and over again through the system, the prudent people will take a portion of it and put it aside into their savings. It is the sensible thing to do, and it is the seed of all wealth.

So whether you decide to spend or save your bonus money, rest assured, you are still doing your bit for the economy. The important thing is that you also do the right thing for your own finances.

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