advantages and disadvantages of deficit spending
Advantages and Disadvantages of Deficit Spending
In layman's terms, deficit spending occurs when spending exceeds income. The following Buzzle article enlists the advantages and disadvantages of deficit spending.
"To reduce deficit spending and our enormous debt, you reign in spending. You cut the budget. You don't take more from the private sector and grow the government with it."
Widely used in the disciplines of economics, finance, and the government, the meaning of deficit spending varies according to the context. That said, the underlying principle remains the same, i.e., less income, more spending. The subject has also been a topic of world-wide debate amongst economists. While liberals maintain the opinion that this concept increases economic growth, conservatives argue otherwise. The theory is outlined in the following paragraphs, along with its positives and negatives.
― Sarah Palin
The Theory
- When a person or the government spends more than he/it makes, the concept is referred to as deficit spending.
- Deficit spending by the government needs to be financed through some other means of financing.
- Since the spending increases, the economy tends to increase.
- The excess borrowing from other sources, however, can have serious consequences later.
- Renowned economist, John Maynard Keynes, supported the concept of deficit spending during a recession.
- However, excess debt is a constant accompaniment to deficits, and this results in improper planning or capital mismanagement.
- The pros and cons are decided on the interpretation; an advantage may be considered one until it gives beneficial returns, otherwise, it can prove to be a loss too.
- To be more precise, say, due to deficit spending, the government spends more on infrastructure, which is good for economic growth. However, it needs to borrow heavily from other nations, which is a disadvantage in the long run.
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.