Deficit Spending
Introduction
The Great Recession is the greatest worldwide downturn of the United States Economy, since the Great Depression, which occurred in the 19th century and lasted for about ten years. It caused a lot of suffering and misery all over from the political, social, and cultural organizational structure to human being’s conception. Production was declining, and so was the economy both in the rich and developing countries (Wilson, 2018). As a result, the budget moved from spent over $700 million surpluses to $2.7 billion deficient in two years to stimulate the declining economy. Deficit spending, therefore, occurs when a government’s expenditure exceeds its revenue in a fiscal period, thus leading to higher government debt (Lago-Peñas et al., 2019). The essay analyzes the advantages and disadvantages of deficit spending and the effects of federal government borrowing on the economy.
Advantages of Deficit Spending.
Some situations make deficit spending essential. According to Dăianu, (2018), during the Second World War deficit spending assisted in financing the U.S. military to protect the land and the citizens as well. The Keynesians economists, however, recommend that deficit spending be used for development purposes. For instance, the deficit can be used to cater for reduced tax rates or by the purchase of goods and services by the government. This will help in the stabilization of the economy by attracting more investors who create more job opportunities, thus increase revenue. Additionally, Deficit Spending forces the government to control its spending as it entitled to pay back the loans at very high interest.
Disadvantages of Deficit Spending.
Deficit Spending still has negative effects. To begin with, it often leads to a weak economy as the government will have to increase the tax rates and the prices of the commodity, thus leading to inflation (Ullah, 2016). This occurred during the Second World War as the deficit financing was used to fund the military, which is unproductive. As a result, the U.S. Deficit Spending over the years has been out of control. Moreover, the fact that deficit finances lead to a further recession reduces investments as the investors will avoid setting up businesses in such a country. Nations or institutions lending funds to a country in a recession may set policies such that the country will have to change some policies on spending, thus the risk of its sovereignty.
Effects of federal government borrowing on the economy
Federal government borrowing has more negative than positive effects. Apart from the high-interest rates and inflation, crowding out is also a negative result of government borrowing. The Crowding Out effect is a concept that explains cases where personal consumption of goods and services as well as investments reduced (Anyanwu et al., 2018). As a result, there is a decline in financial resources and interest rates are incredibly high. The increased interest rates reduce private investments, thus a reduced income to in the economy. Also, high-interest rates affect mechanisms used to finance debts which increases the cost of investment.
In conclusion, deficit funding is, however, not a problem and must not affect the short-term and long-term economic growth of the country at hand. How the government uses deficit finance is the key determinant of whether it will boost its economy or hinder its growth. If deficit financing is directed to investments and productive projects only, it could help in the country’s economic growth. Nevertheless, when such funds are used to finances unproductive projects such as war, the country’s economy must be affected. A government must, therefore, make a solid decision when applying for such funding and must also set new policies on its expenditure.