Problems of Government Borrowing

Readers Question: What are the implications of a growing fiscal deficit? (60 marks)
Especially need a strong evaluation points and some ideas for this essay.

• Fiscal Deficit means government spending is greater than tax revenue and therefore government has to borrow.
• Problems of fiscal deficit include:
• Crowding Out. – Government spending reduces the amount of private sector spending. Also government spending is said to be more inefficient.
• Higher taxes lower spending in the future.
• Possibly Higher Inflation, if financed by increasing the money supply
• Possibly higher interest rates. If government struggles to borrow sufficient money then it puts upward pressure on interest rates.

For more details see: Effects of Budget deficit

Evaluation

1. Depends when you Borrow. For example, in  a recession, government borrowing can help to boost AD and increase the rate of economic growth.
2. Depends what you borrow for. If you are borrowing to invest in better infrastructure and investment then it can help the long term growth of the economy. If you are borrowing to pay pensions to an ageing population this gives no long term benefit.