Advantages of Government Borrowing

Government Borrowing can be acceptable under certain conditions

us-tight-fiscal-policy

In 2008/09, US borrowing rose sharply as the economy went into recession. The borrowing enabled the government to bailout the car industry and provide automatic fiscal stabilisers. Without government borrowing, demand would fall by more.

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 are tempted 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 budget deficit. However this extra spending is unlikely to increase economic growth significantly

3. Deal with crisis

uk-national-debt

UK debt rose sharply in the major world wars. In times of peace, national debt as a percentage of GDP fell.

Related