Concept of deficit budget and advantage and disadvantages
Answers
Definition of Budget Deficit. A budget deficit occurs when an individual, business or government budgets more spending than there is revenue available to pay for the spending, over a specific period of time. Debt is the aggregate value of deficits accumulated over time
advantages
Increased Economic Growth
It is considered one of the positives of deficit spending.
When a government spends excessively, it can afford to buy infrastructure for the country.
This, in turn, leads to employment of labor force.
As more money flows into the country, the overall economy growth rate accelerates.
This is especially useful during a recession, as this can stimulate jobs, increase businesses, private investment ventures increase, and consequently, the nation's economy rises.
Control
Deficit spending leads to a budget deficit.
Running a budget deficit assures that the government bodies think twice before making unnecessary investments.
The interest rates matter as well, and a higher interest will force them to think of plans to pay back the debt as soon as possible.
It needs to impose more taxes so that the interest rates do not matter a lot.
Disadvantages
No Savings
An individual/government will have no savings during a deficit period.
This is extremely problematic as during emergencies, there will be no stash to rely on.
This leads to excessive borrowing from other nations, that too at a high interest rate.
Excessive debt continues to pile up and a vicious circle is created.
Rising Costs
To retain the excess expenditure, government increases taxes.
Prices rise more than usual, this leads to inflation.
There is a drop in the standard of living, ultimately resulting in a sorry state of affairs.
Foreign Expenditure
Though the government borrows from other nations and this leads to increased infrastructure, the fact remains that the borrowing is done at a very high interest rate.
Money does flow in, but the debt remains; the actual investment of the country does not increase, taxation reduces, and the debt keeps piling up.
Subsequent measures need to be taken to pay off the debt and increase the internal revenue.
Points to Ponder
Most economists with a neutral view, suggest that the right kind of spending can spur economic growth.
As mentioned earlier, this subject is a topic of debate amongst the conservatives and the liberals.
Herbert Hoover, one of the economic experts, was openly against deficit spending around the Great Depression, because he believed that deficits would destroy the country's foundations.
Keynes, of course, as mentioned before, supported deficit spending, especially when the country is financially downtrodden.
Another important point - do not confuse deficit spending with fiscal responsibility, the former is used as a tool of the latter.
The borrowed capital from other nations can also be used for public spending, like education or transport.
Borrowing heavily from global trade markets and international funds can affect the sovereignty of the nation.
History has depicted that a balanced budget does not guarantee a steady economic growth. Government spending increases the scope of private investment, and the effects of public borrowing on the same are significantly erased. All the same, to make use of the situation in a profitable manner is dependent on the individual, the organization, or the government.