Good Example Of Should The Government Balance Its Budget Or Should Not? Argumentative Essay
Balanced budget is a typical story in the science of economics. There is a general belief that the balanced budget is better than the unbalanced budget situation. To understand the background of the belief of a balanced budget, one needs to know how the budget system works.
Budget is a sheet indicating incomes and expenditures of a government. Government incomes are mainly taxes collected from people and companies. Tax laws are arranged by parliamentary of a country. Government is responsible for determining areas where taxes will be spent. Government that receives most of the votes in elections and depending on this idea government can influence tax regulations (Bastida, Beyaert, and Benito, 2013).
Governments can decide to make a budget surplus or a budget deficit or a balanced budget where incomes equal to government expenditures. This situation indicates us that governments have a policy-making duty and depending on government’s political view, the decision of surplus, deficit or balanced-budget is determined. In another word, governments can decide deficit, surplus or balanced budget politically. Thus, balanced-budget is a political decision, not an economic decision (Rosen, 1985).
Many people believe that balanced-budget is relatively better because there is a general assumption expressing that government might use resources inefficiently because governments care political balance in a country. Even some people believe that government has to ensure a surplus. Economically speaking, surplus or balanced budget is not always a desired situation. In this essay, I will explain how governments make their decision on government expenditures and how surplus, the budget deficit, and balanced-budget budget. In this paper, we will explain why the government needs to balance the budget or why the government should not care the budget deficit.
How Government Budget Influences the Economy
Government is the largest agent in the national economies with the public power and abundance of financial resources coming from the taxes. As the largest agent in the economy, the moves of governments can create permanent and large influences on the economies. Also considering that governments can force the other agents in the economies to take some economic actions through policy-making processes, governments are the most influential agents in the economies. Depending on this idea, the government can create a budget deficit and also can develop a program to create a balanced budget. Therefore, the government has the power to take care of creating a balanced budget. However, the government does not have to create a balanced budget (Rosen, 1985).
Governments can lead their economies by using the power explained in the previous paragraph. Governments can develop the economic policies and the other agents in the economies have to take these political decisions into their consideration. Governments have the power to redistribute income in their economies and develop a new economic balance (Cok, Urban, and Verbic, 2013).
Assuming that governments are socially responsible organs in the political arena, one might assume that governments will act socially responsible and try to maximize social utility. Considering that governments are elected to most of the votes in the country, it is possible to assume that governments represent public preferences. However, in many country cases, it is possible to observe that governments develop some policies not appreciated by the public. Therefore, the assumption of goodwill about governments is falsified in many countries even if governments are elected (Bastida, Beyaert, and Benito, 2013).
It is possible to falsify the assumption of goodwill about governments; however, considering that countries have a democratic system, democratic systems have a monitoring system on governments’ action. These monitoring systems can force governments to develop actions for maximizing social utility. Also, elections are important for controlling governments' actions. If a government cannot develop the economic policies appreciated by the public, the political party(ies) might lose elections. Consequently, democratic management in countries can develop a control mechanism on governments (Bastida, Beyaert, and Benito, 2013).
Another important issue about governments’ economic policies is that governments represent a major group in the society and following their ideological election declaration governments develop and implement economic policies. Thus, the economic policies developed by governments might not be acceptable to every agent in the economies. However, the democratic management requires this situation.
Consequently, governments can develop fiscal policies that involve using budget and the ideological view of the political parties on power influences the preferences in fiscal policies determination. Following this idea, developing an economic policy resulting in a budget deficit, budget surplus, or balanced-budget is the result of political thinking and governments have the rights to develop economic policies and lead the other agents in their economies (Rosen, 1985).
Why the Government should balance the budget?
The government as the largest entity in an economy might use most of the resources in the economy to produce the public services. The social state approach requires that the government produce many varying social services. The social state sounds good to many people. For developing a relatively better understanding of the social state and its influence on the economy, we need to remember how the social state has come true (Koster, 2008).
The social state discussions have started after the economic crisis in 1930s. The Keynesian approach was suggesting increasing the government spending to stimulate the economy by developing the aggregate demand in the economy. Increasing government spending has occurred in developing a social state. Social state is considered as a structure that develops very well-developed social services for everybody and high level of social rights for citizens. For instance, the workers are supposed to receive a high level of payment and other rights. Providing many social services and social rights to the people was appreciated by the public, and that was the solution to stimulate the economies from 1930 to 1950. However, high level of social rights caused some new problems in the economies those are called sticky wages and social rights. Sticky means that people appreciate receiving new rights and high wages, but they do not want to give up on those (Brewer, Oh, and Shilpi, 2013).
Stickiness in the economies created a huge problem. The production costs in the economy due to the high level of wages were increased, and the government spending was increased by providing the wide social services. The governments have had large debts- budget deficits. To finance the government debts, the governments needed to gather the resources in the economies. Considering that the economies have limited resources, more resources were transferred to the governments for continuing the social state approach (Brewer, Oh, and Shilpi, 2013).
Transferring the resources to the governments requires a process as thought that the resources belong to the private companies. The government prints short run and long run bonds and sell them in the financial markets by offering an interest rate. Considering that the saving owners have a return rate of their businesses or an interest rate offered by the financial institutions, the government has to offer a relatively higher level of interest rate to the saving owners to be able get loans from them. In this case, the interest rates in the financial markets increase.
As known from the macroeconomics theory, while interest rate increases, the demand for the investment expenditures decrease. In another word, investing in the economy becomes relatively more costly for the investors. The saving owners and even the investors prefer giving their resources to the government to receive the high level of interest income from the government.
When the interest gain increases in the economy, the gains from the real industries decrease because people like generating income with relatively less effort. However, this situation decreases the efficiency of the economies. The real returns on the resources in the economy decrease. The production decreases in the economy, and the country becomes an importing country because the economy cannot produce enough. The national resources go to the other countries to import relatively more from the other countries.
The high production costs, increasing interests rates, relatively more imports, and some other changing macroeconomic conditions bring the inflation problem. The general price level increases in the economy. The inflation problem and the high-interest rate problem interactively deepen the problems in the economy.
Consequently, the social state caused high budget deficits, and the economies were transformed into relatively fewer efficient economies. This negative effect of the social state approach is named as crowding-out effect. The crowding-out effect indicated in 1950s that the government should balance its budget and not overspend.
Although the experiences in the 1950s have required balanced budgets, the following time economic conditions have shown us that the governments might not be able to keep their budgets balanced. In the following parts, this paper will discuss why the governments should not care the balanced budget or cannot keep the budget balanced.
Why the Government should not or cannot balance its budget
After 2000s, the global economy and the domestic economies have entered into a new age. The financial and economic crises are carrying different characteristics, and the governments have to develop new recipes for recovering their economies. Consequently, the balanced budgets may not be a solution for recovery, or it might be impossible to the governments to keep their budgets balanced. I will discuss this under four titles: 1) Redistribution of Income, 2) Economic Crises and Intervention, 3) Long-term Budget Influences, and 4) Efficiency of Public Investments and Government Budget.
Redistribution of Income
Managing government budget causes a redistribution of income in the economy. Governments collect some financial resources from people and companies as tax and distribute these resources through government expenditures. Simply, government redistributes a part of national income in its economy. Considering that taxpayers and financial resource receivers as a result of government expenditures are not fully same people or companies, managing government means destroying an equilibrium in the economy and developing a new equilibrium in favor of a group of people or companies. Governments are given this right constitutionally. Following this idea, managing government's budget, causing the budget deficit or keeping budget balanced are some political decisions, and they are different ways of redistribution of income. Thus, keeping the budget balanced means that the government is trying to stay away from debts; however, even if the budget is balanced, the redistribution mechanism still works. Therefore, the main aim is not to keep the budget balanced; the main aim is how to manage the redistribution of income (Cok, Urban, and Verbic, 2013).
Thus, redistribution of income through fiscal policies (collecting tax and making government expenditures decisions) is based on political decisions and develops a new political and economic equilibrium. Governments, politically, make decisions on developing some sectors in their economies while diminishing the resources for the other sectors.
The views of the political parties in power are the main influence on the economic policies. For instance, the liberalist parties are for a free market competition. Therefore, the liberalist parties avoid creating interventions to the free markets. The socialist parties are for social development, and they might charge high taxes to the companies to finance some social programs. Even in some countries like Turkey, we observe that governments can use the fiscal policies to support a specific opportunity group in the community to make sure that the political party in power wins the future elections. Thus, governments can create their rich group in the community and by using this economic power they might prefer continuing their political power. However, such approaches are mostly non-economic approaches and causing some economic crises (Cok, Urban, and Verbic, 2013).
Economic crises mean unsustainable economic and political systems. In this case, the crises are forcing governments to take some immediate actions and intervene the markets. Considering that government budget management is an intervention in the markets by redistributing income, the economic crises require transforming the interventions into an economic policy for the economic recovery.
Economic Crises and Intervention
Every capitalist economy and the global economy face economic crises at almost ten years intervals. Each new crisis introduces us new characteristics and some failures in the local and the global markets. Thus, each economic crisis requires developing a recovery policy depending on the characteristics of the specific crisis.
In 1930s, the global financial crisis was due to the lack of necessary demand for the products. The Keynesian economic approach developed a fiscal policy solution to this crisis as the governments spent to stimulate the economy. In 1970s, the crisis was due to the increasing production costs because of increasing petroleum products' prices. The solution was to create some incentives for the producers. Thus, the producers could decrease their production costs. In 1990s, many developing economies have faced insufficient exchange reserves, and they could not provide enough other currencies to continue their international trade, and the monetary policies were developed for the economic recovery. In 2000s, many countries have the financial system crashes because the financial systems in these countries were not deep enough, and they needed to develop their financial institutions and financial markets through legal regulations. In 2008, the world faced the financial crisis of overspending in the developed countries. Because the financial institutions provided easy credits for everybody in the economies, people have bought very expensive houses even though they did not have the economic power.
Each crisis the economies and the global economy faced; the fiscal policy has been one of the most important tools for developing recovery programs. Especially considering that the governments can immediately make decisions to use the governments’ fiscal resources, fiscal policies have been easy to implement immediately. Many of the crises required spending more than the government incomes and the governments have faced sovereign debt problems for recovering their economies (Sebastian, 2009). Thus, the economic conditions might force governments to have budget deficits and it might be impossible to have balanced budgets. It might be possible to have balanced-budget in these cases on the cost of increasing the depth of the economic crisis (Kim, 2004).
Consequently, even if governments represent a political view and try to develop and implement some specific economic policies, the economic crises might force the governments to develop some economic policies against their political views. Therefore, it is possible to claim that the economy management is not always endogenous, and it might be open to the external influences caused by the economic and financial crises. Simply, the financial and economic crises might force the government to have a budget deficit. Trying to balance the budget during the recovery time might create relatively more damages in the economy. Therefore, the budget deficit might become inevitable.
Long-term Budget Influences
Managing government budget requires a short term and long term planning because fiscal policies might have some long term results. Therefore, aiming at some goals in the short term is only a part of designing fiscal policies. However, many governments are selected for time periods less than ten years. Considering that the long term is assumed to be more than ten years and governments might prefer short term goals and ignore long-term influences of fiscal policies, it is possible to have an unplanned long term fiscal policies.
The differences between the results of short term and long term fiscal policy goals might create a contradiction. In the short term, governments might follow relatively more populist fiscal policies and increase government spending. The increase in government spending in the short term might financed through increasing government debts in the short term or selling long-term debt papers. In both ways, the increase in the short spending will be financed in the long term. In another word, the next generation will be paying the expenditures of early generations (Sebastian, 2009). The basic idea behind this is the long-term balance in the government budget. In the long term, the government budget gets closer to the balance point.
Consequently, the relation between spending and income in the governments' budgets reaches the balance where income equals to spending. Following this idea, it is possible to develop the idea that it is not possible to create long-term budget deficit (Kim, 2004).
Following the idea in this part, keeping the budget balanced in the short term means making current people to pay for the government spending while having a budget deficit in the short-term means making the next generation to pay the government spending today. Depending on the political view of the government, it is possible to have a budget deficit in the short term and make the next generations pay the government spending. Also it might be possible to have some opportunities for the community in the short term, and the government might prefer taking this opportunity and creating a budget deficit in the short run.
Efficiency of Public Investments and Government Budget
Another main issue about government spending is efficiency of government spending. Government might create public investment through using taxes. In general, it is assumed that public investments are relatively less efficient compared to a private sector investments. There are two main reasons behind this: 1) goal of public investments are social efficiency and not economic efficiency, and 2) public investments might be subject to some corruptions (Curristine, 2005).
Public investments aim at developing a capacity to increase the amount or the quality of social services. Based upon this idea, it is easy to see that the public investments are not designed as efficient investments economically. For increasing the social utility, the governments might prefer economically inefficient investments (Curristine, 2005).
Secondly, we observe in many developing countries that the corruption is an essential reason for the inefficiency of public investments. Corruption is a complex case to solve in the developing countries. There are opponent groups in these countries and for promoting their ideological movements, the political people might allow corruptions in the system.
Consequently, the inefficiency in the public investments might cause budget deficits in the short run. Due to the nature of public investments, if a government continues public investments, the budget deficit becomes inevitable in the short run. Some governments prefer privatization of public investments to get rid of inefficiencies and budget deficits due to the inefficient public investments. Considering that the governments can stay in power in the short run, it might not be possible to correct the structural problems. Thus, the budget deficit caused by the structural problems might be inevitable to the government (Curristine, 2005).
Budget deficit might occur in the short run; however, in the long run, the budget deficit is not a problem. Depending on this idea, the budget deficit should not be the main issue in budget management. As known, many companies and governments develop debt management and by using external financial resources they can reach their goals. Therefore, governments should be more concerned about reaching economic and political goals.
Governments develop political programs including an economic development program to get elected. The voters are sensitive to implementation of these programs because they decide their votes depending on these programs. Each economic development program requires budgeting and financial resources. Therefore, we might conclude that the economic development programs or recovery programs requires spending and budget deficit in the short term. However, if the debt management is developed well, the budget deficit might not be an eminent problem (Bastida, Beyaert, and Benito, 2013).
As the last word, the budget deficit is sometimes inevitable to the government, and usually the budget deficit is not a main problem for the government. The main goal is to create an economic development and sustainable economic and political system. Therefore, the government might use more resources than income and cause a budget deficit.
Bastida, Francisco, Arielle Beyaert, and Bernardino Benito. 'Electoral Cycles And Local Government Debt Management.' Local Government Studies 39.1 (2013): 107-132. Web.
Brewer, Kathryne B, Hans Oh, and Shilpi Sharma. 'Crowding In Or Crowding Out? An Examination of the Impact of the Welfare State on Generalized Social Trust'. International Journal of Social Welfare 23.1 (2013): 61-68. Web.
Cok, Mitja, Ivica Urban, and Miroslav Verbic. 'Income Redistribution Through Taxes And Social Benefits: The Case Of Slovenia And Croatia.' Panoeconomicus 60.5 (2013): 667-686. Web.
Curristine, Teresa. 'Government Performance.' OECD Journal on Budgeting 5.1 (2005): 127-151. Web.
Kim, Soyoung. 'Inflation Volatility, Government Debts, And The Fiscal Theory Of The Price Level.' Economics Letters 85.1 (2004): 117-121. Web.
Koster, Ferry. 'The Welfare State And Globalisation: Down And Out Or Too Tough To Die?'. International Journal of Social Welfare 18.2 (2008): 153-162. Web.
Rosen, Harvey S. Public Finance. Homewood, Ill.: R.D. Irwin, 1985. Print.
Sebastian Nieto-Parra,. 'Who Saw Sovereign Debt Crises Coming?'. Economia 10.1 (2009): 125-169. Web.
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