What Is Deficit Spending And How Does It Work

Deficit Spending
Name
Institution
Deficit Spending
Bodea and Higashijima, (2017) defines deficit spending as a fiscal and economic policy in which the underlying value of purchases outweighs the income. While deficit spending could be evident in businesses it is highly evident in the budget making processes of central governments across the world. Barker (2014) attribute the increasing dominance of deficit spending in government to the fact that in most cases, government expenditure tends to exceed the volume of revenue generated; an aspect that creates a deficit of the budget. As a consequence, the deficit is covered by the agencies meant to foster effective functioning of the government through creation of new currencies, selling bonds and borrowing from the general populace. On the other hand Bodea and Higashijima, (2017) reveal deficit spending functions through imposition of higher tax rates, increasing the charges for public utilities, and prices of commodities. The current study seeks to undertake a critical analysis of the advantages and disadvantages of deficit spending as well as the fiscal issues underlying the crowding-out effect in the perspectives of government.
Advantages
Deficit spending plays a significant role in fostering economic growth. Bodea and Higashijima, (2017) explain that by borrowing, the government is acquainted with the opportunity of accessing the funds it requires to undertake infrastructural development and to create employment opportunities. Barker (2014) explain that an increase in the levels of economic development leads to the attraction of foreign and local investors; an aspect that increases the government’s wealth.
Deficit spending enhances the levels of governmental control on its expenditures. According to Bodea and Higashijima, (2017), governments financing their development agenda by the use of borrowed funds tend to increase their levels seriousness when undertaking investments and budgetary processes as they are well are of the fact that they will be faced with the obligation ...