Advantages of Deficit Spending Writing Assignment

Deficit Spending
Author’s Name
Institutional Affiliation
Deficit Spending
1. Introduction
Deficit spending is explained as a situation, where expenditures of government are more than the revenues gathered in a fiscal year. If the revenues become insufficient to fund the government spending, then government must focus on borrowing money. Reasons for persistent deficit spending are, high level of tax evasion, inequality in wealth and income levels, government inefficiency in collecting taxes, and high level of government subsidiary and financial support. Deficit spending has lot of interrelated economic effects. The effects are deficit financing and inflation, and deficit financing and economic development. Deficit spending is considered as part of expansionary fiscal policy (Wang & Wen, 2017). Government with low savings use the deficit spending as an important source of capital accumulation. Deficit spending increase the government expenditures and it create a favorable multiplier effect on national income, savings and employment.
2. Discussion
2.1. Advantages of Deficit Spending
Deficit financing is considered as one of the easiest form of financing and it has lot of advantages, especially for developing economies. Deficit financing provides lot of resources for developmental expenditures and further contribute towards higher economic growth (Merino, 2013).
Deficit spending can be more beneficial than higher taxation during the period of recession. When economy faces recession, the aggregate income decrease and further contributing towards more unemployment. In this situation, if the government raises taxes for compensating the higher cost of government subsidy programs, then it is expected that businesses and individuals will struggle for meeting the rising cost of taxation (Pettinger, 2017). Deficit spending can be an effective strategy for providing finances for improving the economy rather than getting depended on increasing taxes.
Deficit spending is usually considered as inflationary process of financing. If government control the inflation level up to an extent, then deficit spending will promote economic development by offsetting the disadvantages of price rise. Rise in inflation encourage the private investors to invest more financial capital and it further improves the economic development (Muley, 2018). Overall, it is easy to establish that deficit spending can be used by governments for achieving high economic growth rather than getting depended on the option of increasing taxes.
2.2. Disadvantages of Deficit Spending
Deficit spending also creates disadvantages within the economy. If the spending increases, then the cost of national debt also rise and further contribute towards higher inflation. Deficit financing led inflation provide help to businesses but individuals with fixed earnings get negatively affected. This situation also promotes income inequality in overall society (Ayres, 2016).
Deficit spending also promote distortion in the patterns of investment. Investors with higher profit motives focus on profit yielding industries. Higher investment in specific industries is not a suitable trend for protecting the complete interest of economic development. Inflation decre...