Deficit Spending
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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.
