What are the risks of high fiscal deficit?
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Answer:
Higher deficit since FY09 and higher borrowing has resulted in lower savings and lower growth in the economy. ... Higher deficit, as argued by neo-classical economists, also results in decline in savings rate—the gross domestic savings has declined from the level of 36.8% of the GDP in FY08 to 32% in FY12.
See the Answer Below mate :-
1)Reduce money supply in an economy :- To finance the deficit,the government goes on a borrowing spree. This leads to people and financial institutions buying up government bonds thus reducing the money in supply. Financial institutions also have less money to lend to businesses and individuals as they have already lent to the government.
2)Crowding out of the private sector :-This means that private business and individuals cannot get loans favorably. Government loans are considered stable, while lending to private sector is considered risky. Banks therefore set a much higher interest rate on these loans to private sector.
3)External debt leads to outflows from the local economy :- When a government resorts to external debt to finance their deficits, they will have to pay interest on these loans which will lead to cash outflows from the local economy leading to inflation and other macro and micro economic issues.