DEFICIT SPENDING AND FEDERAL GOVERNMENT BORROWING

DEFICIT SPENDING AND FEDERAL GOVERNMENT BORROWING

ABSTRACT

Most economies strive to attain surplus. This is when a countries income and its receipts are more or outruns its use/expenditure. However, in most cases, having a budget surplus is next to impossible as most economies usually face a deficit. A deficit spending by any government eventually leads to debt. Deficit spending implies that an economy is spending more than its earning. The government, to satisfy the high demands that are not met by using its income resources, ends up borrowing money. This paper will try to analyze deficit spending, looking at its advantages and disadvantages to the economy of a nation. This paper will also look at federal borrowing by the government and how it affects an economy.

On the first page, this paper will discuss what deficit spending entails, which causes high deficit spending. This paper will continue to look to analyze the positive and negative effects of deficit spending. The relationship between deficit spending, debt, and government spending will be discussed in this paper. This paper will also focus on why there is a need for government borrowing and even the effects it has on the economy of a country. Both the positive and negative effects of government borrowing will also be focused on this paper. Keynesian and monetarists views on government borrowing will also be discussed by the end of this paper.

Certain factors in an economy are vital contributors to having a deficit. One of the key factors that contribute to creating a countries deficit is having high levels of unemployment, which in turn reduces the tax revenue to be collected. Another factor that leads to the deficit has high economic growth. Having an economy that is growing at a very fast pace usually leads to an increase in demand, which the local market cannot keep up with. Thus the country is forced to import more than its exporting. Government borrowing money is another factor that creates a deficit. Having high inflation is also another factor that creates a deficit.

Unlike deficit on individuals and companies, which results in bankruptcy and junk bond, respectively, the deficit on government works differently. A nation spending more than it is earning is not always a bad thing. This means that the government engages in ways to get more financial aid, which will satisfy the high demand of its people. In most cases, when a government borrows money, though it’s adding into the nation’s debt, it is also able to grow and develop. This shows that having a high deficit, in turn, leads to having high debt in a nation. Taking the United States of America as an example, the former president Bark Obama had added debt of $ 8.6 trillion. However, he totaled a budget deficit of $ 6.8 trillion.

Having debt is not all a bad thing. Most nations with debt are able to grow and develop at a faster rate. Some can even reduce the large debt gap through these economic growth projects. A country having a deficit means that the government is trying to satisfy its people and also run affordable services to the people. Having a high deficit spending, in turn, add the money in a nation’s economy. Through this money, the government can boost its revenue sources. The government achieves this through ways like job creation. An increase in jobs leads to an increase in tax money.

Another way deficit spending is used on a positive note is by politicians. The people of a nation depends on the government for essential need. Politicians use this to their advantage and promise people on more benefits, more growth, and better services. Once they are elected, the government needs to stand firm on their promises and thus creating a deficit. This is why most presidents, once elected, increases the budget deficit of their nation’s economy as they try to implement what they promised.

Another merit for having a deficit is that the government is forced to plan and take control of spending. With the government having obligations to pay off their loans, they are forced to make a wise decision and make good plans that will help in the spending of the nation. This, in return, will help in making profitable plans while starting projects.

The debt created by deficit creates a self-damaging cycle as a country is forced to borrow in order to their debt in order to pay the old debts. This, in turn, will lead to a very poor economy. When any nation does not have a surplus, then it has no savings. Lack of savings will cause a number of major problems for the country. The nation will not have any funds in case of emergency situations. Taxes will also be hiked so that the government can increase their earning to be able to pay off some of its loans. Commodities of prices will also be hiked, and there will be a reduction in public services. All these will eventually create inflation and low living standard.

Countries with a high deficit will have more debts. This decreases investment in the country. Investors will be discouraged due to the country’s inability to build better infrastructures, thus having poor business working environments. The most serious demerit in having a high deficit is a country can lose its national sovereignty. When a countries economy is poor and has a lot of debt, it is forced to meet some demands before receiving any more financial loans. Some of these demands may include changing its law and policies on spending. Other demands may involve selling some of its lands or assets.

A budget deficit is an amount the government borrows annually. Over a long period of time, this budget deficit turns into a national debt. The main reason why most governments borrow money is so that it can have high spending without the cost of increasing taxes. The government is normally forces to borrow due to many key factors. Among those factors is tax revenue being of small quantity than estimated. Investment is another reason that forces the government to borrow. Since most investors are attracted by places with good infrastructure, the government is forced to borrow money so that it can meet these demands. Spending commitment is another reason for the government to borrow.

Keynesian views on government borrowing

In a recession, Keynes opted government to have high borrowing. His main argument was that, in times of recession, spending on the household is reduced, and investments are cut back. As a result, a lot of unused resources. Private firms start to rice. He stated that government borrowing would not cause crowding out but rather restart economic activities. In the end, government borrowing will lead to the recovery of its countries economy and will also help boost tax revenues.

Crowding out means that private sectors will deteriorate as they will have loaned money to the government. Government borrowing from private sectors will lead to them having no money to invest further. In crowding out, government spending is increasing as the spending of private spending continues to fall.

Monetarist views on government borrowing

According to monetarists, politics is the main factor that leads to government borrowing. Political pressure and interests usually keep the government focused on raising its spending. Milton Friedman argued that the only permanent thing is a government’s temporary program. He stated that political interests are the reason government spending keeps increasing.

Government borrowings normally create some potential problems in the economy of a nation. Crowding out is one of the demerits of government borrowing. Other effects of government borrowing are inflation, increased taxation in the future, interest rates that are increased, and the nation’s economy is prone to capital flight.

Conclusion

In conclusion, government borrowing on an economy is either a merit or a demerit depending on the purpose the government is borrowing. This paper has looked at the key causes of deficit spending like low employment levels, high government borrowing, and an economy growing at a fast rate. The effects of having a high deficit spending on the economy of a country have also been discussed. Government borrowing and why there is a need for the government to borrow have been listed. Factors like the need to stabilize the economy and attract investors are some of the reasons the government borrows. Views of government borrowing like Keynesian and monetarist have been discussed and explained. The effects of both deficit borrowing and federal government borrowing, both positive and negative, are the key focus for this paper.

References

Brown-Collier, Elba K., and Bruce E. Collier. “What Keynes said about deficit spending.” Journal of Post Keynesian Economics 17.3 (1995): 341-355.

Hahm, Sung Deuk, Mark S. Kamlet, and David C. Mowery. “The political economy of deficit spending in nine industrialized parliamentary democracies: The role of fiscal institutions.” Comparative political studies 29.1 (1996): 52-77.

Mahmoudzadeh, Mahmoud, Somaye Sadeghi, and Soraya Sadeghi. “Fiscal spending and crowding out effect: a comparison between developed and developing countries.” Institutions and Economies (2017): 31-40.