Deficit Spending. Essay Sample
Deficit spending refers to circumstances where the expenditure outstrips income. As a form of a state’s fiscal policy, deficit spending refers to situations where the government spending is more than the income it receives in the form of taxes. Cyclical deficit as a form of fiscal policy occurs where government operate surplus budget during times of economic booms to compensate for budget deficits during economic recessions. In contrast, structural deficits occur where the government expenditure always outstrips income.
Deficit spending as a government fiscal policy is mired in controversy due to the differing views advanced by economists. Under the Keynesian school of thought, the state is obligated to run a deficit budget in times of a recession to fuel economic growth. Such economists, however, postulate that government should run cyclical deficits rather than structural deficits. On the other hand, Hayek and his supporters argue that government should spend what it receives from taxes. Such a balanced budget ought also to maintain some surplus to enable the government to finance its loans. Hayek’s argument is based on the fact that when governments run deficit they have to borrow to meet the resulting shortfall. Such borrowing encumbers future generations who have to shoulder them.
Nonetheless, Chartalist’s view deficit spending has a necessary way for the government to counter economic downturns .In times of a recession demand for goods and services decreases, leading to reduced taxation for the government. Attempts, to raise taxes to cover the shortfall, would be detrimental as businesses would be unable to cope. As such, Chartalist proposed that governments have to incur a deficit to provide investment to the private sector. Additionally, increased government spending in a recession ensures increased employment that in turns promotes public expenditure. Consequently, deficit spending is necessary stabilizing tool for getting an economy out of recession.
Additionally, deficit spending has been held to be a cross-generational method of funding government initiatives. Arguing that the future generation stands to gain from infrastructure and social amenities put up by present generations, the argument posits that the future generation ought to pay for such benefits. By running budget deficit, the present generation bear a part of the cost while next generation bears the rest by paying for past generations debt. As all generation stands to benefit from current expenditure, all generations ought to pay for it.
While deficit spending may be tendered as an attractive prospect by some economists. Other economist advocates against it based on its effects. Conservatives propose that the government ought to maintain a balanced budget since deficit spending leaves the state with no savings. In a case of emergencies, the government is unable to meet the unbudgeted expenses without incurring further debt. Further loans are counter generational accounting as they are incurred at high-interest rates.
Additionally, deficit spending by the government affects private investment leading to the crowding effect negatively. When a shortfall occurs, the government turns to the private sector to meet the shortfall. As the government offers better borrowing rates and is viewed as a stable debtor, money is diverted from the private sector and lent to the government. Such shift in lending trends leaves the private sector to fewer sources of capital to borrow. The government may also raise taxes in an effort to plug deficits further reducing private sector savings and disposable income. Since the private sector investments are primarily gotten from savings, increased taxation further reduces funds available to the private sector. Such reduction in sources and money accessible to the private sector for investment is what is referred to as crowding out effect.
While the debate continues on whether deficit spending ought to be embraced, information available seems to suggest that cyclical deficits ought to be adopted by government. Due to the cyclic nature of economies, a cyclic deficit provides a sustainable and economic model of sustaining the economy during booms and deflations.
Cooper, R., & John, A. A. (2014). Macroeconomics: Theory through Applications. Chicago: Flat World Education.
Kumar, M. S., & Minassian, T. T. (2007). Promoting Fiscal Discipline. New York: International Monetary Fund.
Mankiw, N. (2014). Brief Principles of Macroeconomics (7 ed.). London: Cengage Learning.
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