Advantages of Govt Borrowing

  • Govt Borrowing can be acceptable under certain conditions
  1. Recession

If there is a downturn in the economy there will automatically be a fall in taxation and higher govt spending on benefits, this will cause a budget deficit. However if the govt attempted to solve the budget deficit by increasing the rate of taxes this would further deflate the economy leading to lower growth and more unemployment. If there is a negative multiplier effect this may actually cause the deficit to increase even more.
Therefore in a recession a deficit is necessary to increase AD

2. Investment.

If there is market failure in the economy such as under provision of education or public transport, the govt should increase spending on these public services. IN the short run this may cause a deficit however if they increase productivity then in the future there will be a higher rate of economic growth and more tax revenues.
However govt spending may not necessarily increase productivity. The UK govt has promised a significant increase in spending on the NHS which is likely to cause an increase in the PSNCR, however this extra spending is unlikely to increase economic growth significantly

 

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