Budget, Elections and Spending

It's known that this year's budget is mainly focused on reducing govt spending, and putting more money in the hands of people by reducing overall income tax on individuals. But this doesn’t mean that the total income tax collected will be less. Improved economy means total income tax collected by the government will be more. Some economists believe that people are rational. That is they believe in Ricardian view that if government reduces taxes today it will make up for it by increasing taxes in the future.
I just went back in time a little bit to see how rational I was back then when I was working or how rational some of my friends are who are still working. I didn’t know that Ricardo existed back then. It simply means I was not rational ☺. There was a certain level of bank balance I wanted to maintain all else went into spending. If I had more money there were more chances that I would spend at least some considerable part of it on restaurants, real estate etc rather than saving it up. So consumptions should increase by some factor. I don’t believe it increases household saving too much. The reason is the number of taxpayers in India is around 35 million at the moment (google search ☺). Most of them (in my opinion) have a certain targeted savings, which they always try to maintain as long as they are having a job. The rest should be used to buy cars, household appliances, houses etc. This is at least what I observed when I was working.
If government is reducing its expenditure it has to be balanced by increase in investment and consumption etc (This is classical economics can be got from a book). But I want to bring in the factor of Elections to recession. The election commission has spent more than 10,0000 crores. Taking an average 200 contestants from a state and an average outlay of 5 crores from each contestant. In total around 28000 crores would be spent. But from where does this money come from? This is mostly black money. Think of it this way if there was a total Rs.100 in the economy and black money was Rs 20. That means this Rs 20 is something, which is stashed somewhere and is not in circulation. So we can say money supply is Rs.80. This sudden spending by individuals not only creates jobs for the unskilled people during elections but also suddenly adds money to the system, which was earlier simply not there for use. So using our IS-LM curve we can say that government’s liberal attitude during election year not only increases total output but this sudden infusion of money into the system also increases the output further. So elections in recession are not so bad after all.
The interesting thing is government is reducing its expenditure just after the election year. This should at least cut down the opportunities for politicians to make some money out of granting government contracts and others. Thereby decreasing black money accumulation and reducing money supply. So this should be a blessing in disguise to the economy. I wish there was some way to get the black money stashed in some of the government employees and put it back in the system ☺. But anyway this stashing up of black money might have favorably impact on inflation ☺
I am no authority on economics. Post your comments I want to learn from all my blog viewers ☺