Deficit Spending and Impact of Government Borrowing

Deficit Spending and Impact of Government Borrowing
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Deficit Spending and Impact of Government Borrowing
What is deficit spending and how does it work.
Deficit spending occurs when purchases exceed income affecting both the individuals and businesses. In this case, governments tend to have strong incentives in terms of expenditures compared to the incomes. A budget deficit is created when government spending surpasses the income. Unbalanced budget on the expense side will result in a deficit within a given fiscal year. If the government does not settle the imbalance, the deficit becomes a loan. The deficit leads to an uneven growth of the economy, ranging from unemployment, high-interest rates, less saving nationally, and little growth in production. Deficit spending is part of an expansionary fiscal policy. By creating more jobs, people have more disposable money to spend which eventually boost the economic growth. Additionally, tax reductions contribute to the expansion of the economy. A deficit can play a role in stabilizing the growth of the economy. The government can stop descending spiral through tax reductions and expenditures, especially when the economy goes into a recession. In addition, the State can finance a deficit by issuing government treasury bills. Slow implementation of deficit reduction policies leads to higher government debt (DIANE Publishing).
2. Advantages and Disadvantages of Deficit Spending
Government’s spending to the extent of its market borrowing does not result in a net addition to the aggregate expenditure. Governments run deficits because of economic downturns. Whether the deficits are on capital account or revenue, government borrowing leads to the direct addition to gross national expenditure. Reductions in the gross domestic product also lead to increases in the deficit spending. A government may cover deficits by computing its accumulated balances or borrowing from the banking systems which helps to create money. In the short-run, deficit spending leads to a boom in economic growth while in the long run, it leads to a complete disaster. Deficits can have a positive impact on the economy, especially when it starts to slow down. Here the government may assist in maintaining the consumers' confidence through government purchases, reducing on taxation, or through government rebates. When government spending is under control, it will possibly yield positive results. The government may engage in private investment which decreases the unemployment rates, thus boosting an increment in the output of goods and services (Shaviro, 2008). Additionally, deficit spending increases the money flow in the economy, thus accelerating the overall growth of the economy. This is important during a recession because it helps to create more jobs, increase businesses, and privates' investments. The government is also forced to control its spending rate due to high-interest rates while paying off the loans. On the hand, deficit spending can impact the economy negatively. One...