Deficit spending is the amount the government consumes that overtakes revenue over a particular budget year. Globally, it is a system used by most governments for economic stability. Following Kelton (2019), the difference between what it spends and what it collects is in the form of taxes and other payments to itself. Deficit spending can be of either positive or negative impacts depending on the country’s aim in applying it. If well-strategized, it can be of immense aid to rescue the economic growth; it benefits every person in that specific government by opening room for investors. The paper discusses deficit spending, its advantages and disadvantages, and the impact it has on economic growth.
Deficit spending takes place when the government consumes more than the revenues. The government uses deficit spending for economic growth by opening opportunities for private sectors. For example, the private sector can offer loans to people so that they can start their businesses. In deficit spending, the consumption rate is higher than the profit that the government acquires. Therefore, the government spends more than what is available in addition to having more needs. Deficit spending multiplies huge debts with high interests, forcing unstable economic stability and growth. Additionally, with huge debts, citizens of that specific country will suffer through high taxation systems concerning the increased rates. However, deficit planning does not apply to every government; developed countries have stable and innovative economic statuses.
Deficit spending is different from the public debts of a country. Public debts are money owned, and deficit spending is money taken in by the government. Moreover, public debts are more intense than deficit spending when refunding the money (Ehigiamusoe, 2020). Therefore, they are correlated in establishing economic growth; the effects of financial development change in the same way as debt and deficit.
Deficit spending has numerous advantages to the particular government. First, it helps in developing the economic growth in the country by ensuring it falls with time. Second, the funds acquired as debts are used in sustainable development since investors can get loans from the amount. Third, the problem of unemployment is solved since several businesses can be open. Both the loan lenders and the investors will benefit from deficit spending. Therefore, it is a strategy for ensuring the economic growth of the government.
Deficit spending helps during hard and unpredictable times that may occur. During a recession time, they can use the amount to secure their economic status. For instance, with the COVID-19 pandemic, most countries went bankrupt with people losing jobs and investors closing down. Deficit spending, therefore, rescued the economy as the government was capable of managing itself using the amount. On the other hand, high taxation will weaken the economy instead of strengthen it. Regarding the fact that the pandemic disabled the economic status, high taxation would load the citizens instead of sustaining them.
Deficit spending can also cost the government in great ways. To begin with, it increases the debt by increasing the interest in terms of business consumption. The government might be spending and lack ways of paying back. It requires higher revenue, and individuals might fail to pay the revenue. Citizens can suffer from high revenues and disable the economy. Additionally, with deficit spending, the government opens room for more opportunities, therefore more expenditure and no means of paying back.
In the cases when emergencies occur, deficit spending can be a problem. The government might lack excess money to secure the issue. They will then have to ask for more amounts to solve the problem. Asking for more will increase the debt and lead to inflated taxation of citizens to pay back the increased debt. The trading will be high and cost several generations to pay back. It can lead to inflation in the government, causing more problems concerning debts.
Crowding out effects is a term conversant with most economists. It has been grounded on theoretical macro-modeling, and various authors in different contexts have confirmed and falsified it (Slavikova, 2018). It is an increase in interests through deficit spending causing a minimization in private property consumption. The government tends to spend more than it has to enhance its economic status. The crowding-out effect is powerful when governmental aid is more definite (Slavikova, 2018). Therefore, the economy weakens since it spends more than acquiring profits. Additionally, crowding out effects causes an increase in public sector consumption, leading to a decrease in private sector consumption. The occurrence of the crowding-out effect may be a result of fiscal transfers to local representatives, and it comprises their expectations regarding future uncertainties (Slavikova, 2018). Private sectors benefit from deficit spending, and high government consumption causes a fall in that sector.
Covering the advantages and disadvantages of deficit spending helps in short-term economic growth. However, if the government strategizes and plans for deficit spending, it will be a long-term advantage to economic growth. The government can set a way of paying back little through the beneficiaries. Deficit spending should be critically considered before implementation because it requires proficient economists and a clear need for a country to participate.
References
Ehigiamusoe, K. U., & Lean, H. H. (2020). The role of deficit and debt in financing growth in West Africa. Journal of Policy Modeling, 42(1), 216-234. Web.
Kelton, S. (2019). How to tell when deficit spending crosses a line.Bloomberg, March, 7. Web.
Slavikova, L. (2018). Effects of government flood expenditures: The problem of crowding‐out.Journal of Flood Risk Management, 11(1), 95-104. Web.