Tough medicine: Schwarzenegger plan to slash $26 billion deficit

How do governments get out the growing mountain of debt, balance their budget deficits, and avoid crippling their own economies going forward? Simple: spend less and earn more.

Arnold Schwarzenegger, Governor of California has taken it one step further and

provides a solution to California's $26 billion deficit which cuts to the heart of the matter:

July 21 (Bloomberg) — California lawmakers reached an agreement with Governor Arnold Schwarzenegger over how to close a $26 billion budget deficit that pushed the most-populous U.S. state to the brink of insolvency.

The deal, reached by legislative leaders after two months of frequently acrimonious negotiations, would slash spending for schools, public works and welfare programs amid the longest recession since the 1930s. If approved by the full Senate and Assembly, the agreement will also siphon money from municipalities, force companies and individuals to pay income taxes sooner and make it more difficult to receive state aid.

“We came to a basic agreement, a budget agreement,” Schwarzenegger told reporters outside his office last evening. “This is a budget that has no tax increases and this is a budget that is cutting spending and it deals with the entire $26 billion deficit.”

The last sentence says it all – "…no tax increases…cutting spending….and it deals with the entire $26 billion deficit." Wow – this really is tough medicine, but not overdue.

National governments in the developed world would do well to follow the same example. Is it likely to happen? Well, the measures may not win many votes, but given that California would be the world's eighth largest economy, if it were an independent state, it's big enough and with a deficit to match that others may have to take notice.

And although national governments can stall the problem somewhat (e.g. by printing more even debt), this only leads to greater problems in store for the future – leading to currency devaluation, a weakened global position, inflation and ultimately a downgrading of government debt. Left unchecked, results could range from a crippled economy at best to potential default and economic collapse.

Admittedly, such cuts would lead to less spending on healthcare too, with short term challenges for our industry. But what would you rather have….struggle now and develop business models that are leaner, fitter and stronger, or have a broader economy and industry that are shot on a global basis? You decide.

Looks like the Terminator has kept his promise…."I'll be back".


This comment was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.


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