Introduction
Deficit spending occurs when the federal government spends more than the revenue generated. The last four years have seen the federal government spend an estimated $1.3 billion through budget deficits (Hagler, 2013). The deficit spending was even larger during 2007/2007 when the financial meltdown and bailout was at its peak. To finance the excess spending, the government normally borrows from foreign governments. Deficit spending has both advantages and disadvantages to the economy.
Advantages
Shaviro (2008) notes that deficit spending plays a leading role in spurring economic growth during the recession. During an economic downturn like the one the U.S. is experiencing now, a fall in taxation and increased government spending on benefits automatically occur.
Nevertheless, any attempt by the government to solve the budget deficit through increased taxation can be extremely disastrous to the economy since it would lower growth and increase the unemployment rate in the country. In case of a negative multiplier effect, the deficit may increase even further, according to Shaviro (2008). Therefore, deficit spending is exceedingly crucial during a recession since it spurs economic growth by increasing consumer spending, creating more job opportunities, and stimulating business activities in the country.
Jackson (2011) notes that deficit spending increases the unemployment rate in the country by creating fears over the future debt repayment. However, the fears created by the deficit spending is also advantageous to the future of the U.S. economy since it encourages the American citizens to work harder to save more to overcome the bad economic situation expected in the future, as well as to work harder to take advantage of the present tax rates.
Additionally, deficit spending is advantageous since it enables the federal government to obtain funds needed to finance various projects in the country (Hagler, 2013). For instance, the U.S. is currently experiencing serious economic downturn in which it cannot generate enough revenues to funds the various projects. As such, deficit spending is necessary to enable it finance projects such as education, security, and medical needs of its citizens.
Disadvantages
As much as deficit spending is capable of stimulating economic growth, the increased borrowing is disadvantageous since it raises the interest rates (Jackson, 2011). This is not appropriate for the economy since increased interest rates discourages investment in the country. Lack of enough investments in the country slows down economic growth, which in turn increases the rates of unemployment, as is the case in the United States today.
Shaviro (2008) argues that deficit spending is also disadvantageous for the country since its increases inflation rates. In order for the government to repay the borrowed amount, it might increase taxes on goods and services. Tax increases result in an increase in the cost of goods and services, which effectively increases inflation rates, making goods and services expensive to citizens.
Crowding-out Effect
Borrowing funds from foreign countries to finance government spending has been of prodigious concern for the Americans since the government began operating on a budget deficit. The concern pertains to the fact that it signifies that the government is overspending, according to Jackson (2011).
Normally, when the government borrows funds from another country to finance its spending, this causes interest rates to increase due to the increased demand for loans, hence price increase. The increase in interest rates, in turn discourages private borrowing since the central bank’s interest rates influence the interest rates of private and commercial banks.
Conclusion
The recession experienced in the U.S. in recent years has forced the government to operate on a budget deficit. This is because the country has not been able to generate enough revenue to finance its spending. Nevertheless, deficit spending is not good for the economy of the country since it increases the interest rates and inflation, which makes life hard for people. Therefore, the government should try as much as possible to spur economic growth in order to generate enough revenue that which make it avoid operating on a budget deficit.
References
Hagler, J.A. (2013). National security implications of long-term deficit spending. New York: NY: Biblioscholar.
Jackson, J. K. (2011). Limiting central government budget deficits: international experiences. New York, NY: DIANE Publishing.
Shaviro, D. (2008). Do deficits matter? London: University of Chicago Press.