Deficit Spending

Student’s Name

Institutional Affiliation

Date of Submission

Deficit Spending

Every government in the world needs some financial support in order to carry out its day-to-day activities. The money to help run any government is got from the revenue that the it collects from the public. The revenue can be accrued from taxes that the government has placed on various goods and services or fines imposed on people for various offences. At times, however the revenue collected by the government may not be enough to sustain its operations, thus, forcing the government to borrow money to assist in keeping the government running. The instance in which the government’s expenditure exceeds its revenue is referred to as deficit spending. This paper will look at the advantages, disadvantages, and the crowding out effect of deficit spending (Stähler, 2009).

Advantages of Deficit Spending

The advantages of deficit spending by the government can be seen clearly in two main aspects: during a recession and on investment. When there is an economic downturn, the government might result to borrowing. In that aspect, recession is important in increasing the AD. Deficit spending can also help increase investment. When under provision is experienced in the education or public sector, the government might increase spending in the affected sectors. In so doing, the sectors may experience increased productivity in the future, which might result to higher rate of economic growth (Stähler, 2009).

Disadvantages of Deficit Spending

Deficit spending has various effects some of which include rising costs, investment opportunities, and organizations’ emergencies. We will look at the negative effects of deficit spending in each aspect mentioned above. Although there are some positive effects of deficit spending, the disadvantages are immense some of which are felt long after the deficit spending is over and the debt has been repaid by the government (Stähler, 2009).

Rising Cost

Deficit spending causes a rise in the cost of products available for consumers, whether to an individual or an organization. This is because the government will have to buy almost everything on credit, which means it will have debts. Debts also attract interest that means that all commodities the government purchases will have inflated prices because of the interests charged (Stevens, 2012).

Organizations

At the level of organizations, the effect of deficit spending is clearer. Deficit spending in any organization might make it less appealing to lenders, thus, making such an organization unable to get any financial assistance. Deficit spending can also distort financial ratios such as debt to assets and times interest to earned ratios. Such a situation might make outsiders wary of investing in the organizations bonds. Some of the organizations may as a result close down altogether (Stevens, 2012).

Crowding-out Effect

Crowding out effect is the instance where the interest rates of borrowing rises to an extent those corporations cannot be able to afford. When there is a deficit in the spending ability of the government, it usually turns to financial institutions for financial help. When this happens, most financial institutions increase their lending rates to an extent that it becomes too costly for the corporations to afford, thus, limiting their access to financial help (Stevens, 2012).

Conclusion

Deficit spending is often done when a country experiences instances such as economic recess. Economic recess is only a short time experience, thus, when the government results to deficit spending some negative effects are felt which most of the time do not help in economic growth but in fact hinders economic growth. Deficit spending results in employees layoff as most organizations cannot be able to gain access to any financial help that is crucial to their daily operations.

Reference

HYPERLINK “http://www.bibme.org/” o “Edit this item” Stähler, N. (2009). Taxing Deficits To Restrain Government Spending. Journal of Public Economic Theory, 11(1), 159-176.

HYPERLINK “http://www.bibme.org/” o “Edit this item” Stevens, R. E. (2012). Market Opportunity Analysis Text and Cases.. London: Taylor and Francis.

deficit spending
During the Great Recession, like any other economic downturns, as unemployment rises, aggregate income declines causing a major decline in tax collections. On the other hand, with the rise in unemployment, spending on safety net programs rise. So, there are not too many good options available to resort the health of the national economy. It will be very difficult to defend cuts in the federal government programs and especially the programs geared to sustain the minimum of the standard of living for the recent poor. So, government needs to increase its borrowing. Deficit spending refers to government spending exceeding what it brings in federal income and corporate taxes during a certain period. Deficit spending hence increases government debt. Most economists accept that deficit spending is desirable and necessary as part of countercyclical fiscal policy. In such a case, government increases its borrowing and hence its deficit to compensate for the shortfall in aggregate demand. This is derived from Keynesian economics, and has been the mainstream economics view. Following John Maynard Keynes, many economists recommend deficit spending to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the level of employment and lowers the unemployment rate. Government borrowing under such circumstances increases the demand for borrowing and thus pushes interest rates up. Rising interest rates can crowd out (discourage) fixed private investment spending, canceling out some of the demand stimulus arising from the deficit

Write an essay analyzing the advantages and disadvantages of deficit spending and the effects of federal government borrowing on the economy i.e., the crowding out effect.