Fiscal Deficit - Boon or Bane
Autor: Jannisthomas • May 30, 2018 • 887 Words (4 Pages) • 696 Views
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investment, just like a firm benefit by borrowing to invest in a new factory. However, if the government borrows and ill-spends the money or spends it on transfer payment, there may be very limited increase in productive capacity.
During the time of recession or of liquidity trap, the private sector often wants to buy government bonds because they believe it to be a secure investment, and rightly so. This decreases the bond yields thus decreasing the borrowing cost. This becomes a better time to borrow money, because it’s cheaper and reflects that there is high demand for buying government debt. This shows that the private sector doesn’t want to invest in new and riskier projects, and therefore in the absence of private sector investment and spending, the government needs to fill in the gap and basically effecting ‘crowding in’.
A crucial factor in judging the importance of a fiscal deficit is what are the future economic prospects for the country. If the country is predicted to have a stagnating economy, debt (as a percentage of GDP) will probably continue to rise. As opposed to this, if the country’s economy expected to have a high growth, the deficit will automatically cause increasing tax revenues and decreasing expense on unemployment benefits. Markets will worry about the deficit much more, if they feel that the economy is likely to stagnate and is unable to grow.
To sum up, despite all the accompanying fears, there can be lots of good reasons to run the economy in a deficit – at least in the short term. For example, if the government wishes to fund public investment which is expected to offer a high enough rate of return, or in a recession where a budget deficit can play an important role in managing the aggregate demand. In a recession, the traditional fears of a fiscal deficit namely high interest rates, inflation, crowding out etc. don’t actually occur. Rather, government spending financed by borrowing from the private sector can return the economy to its full scale at a quicker pace.
References:
1. www.investopedia.com
2. www.forbes.com
3. www.economicshelp.com
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