Deficit Spending Essay Example

Introduction

Deficit spending is the act of governments borrowing money using bonds or syndicated loans so as to meet developmental goals (Ramey & Zubairy, 2018). It involves borrowing the amount of money above the revenue that was budgeted for. Deficit spending is an aspect of public finance that most governments rely on to meet annual and quarterly budget requirements. Most countries do not get as much income as they would wish and hence, have to rely on borrowing to meet ambitious development goals. For some nations, the level and nature of borrowing is intense and can lead to an economic crisis (Ramey & Zubairy, 2018). Other countries, however, maintain a healthy borrowing culture hence a good credit record. It is important to always consider the need for proper spending and managed budgets. Regardless, the issue of deficit spending is a common ground topic in many economies (Ojede, Atems, & Yamarik, 2018). This essay discusses the issue of deficit spending by analyzing the advantages, disadvantages as well as the crowding out effect.

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Advantages of Deficit Spending

Deficit spending is among the few ways governments manage infrastructural projects. Many economies cannot sustain projects such as roads, bridges, and railways that do not have guaranteed returns. Similarly, the cost of these infrastructure projects is often too high to be borne by the tax revenue income. Borrowing for developmental purposes is a common approach by many governments around the world. It is a common trend especially by developing countries (Boutilier, Caragiannis, Haber, Lu, Procaccia, & Sheffet, 2015). Deficit spending can come in handy when a nation seems to lag behind in infrastructure, and they simply cannot afford the cost. Reconstructing roads and bridges, schools and hospitals, as well as affordable housing, are projects that often need to be done parallel to each other. Deficit spending guarantees that no project is left halfway due to concerns over the funding and the possibility of insignificant returns. Since every government has the duty to offer better living conditions to the electorate, deficit spending becomes a necessity (Ojede, Atems, & Yamarik, 2018).

Deficit spending is critical to the sustainability of an economy. Many times an economy faces a downward slump due to unemployment, lack of job creation opportunities and little demand for commodities. When a country is faced with the inability to market most of its exports, they commonly face a balance of trade deficits. Deficit spending can reverse this balance by ensuring that more opportunities are created to help citizens afford commodities. Stimulus spending packages such as food subsidies and affordable housing are some of the key areas that can sustain an economy in a recession (Ojede, Atems, & Yamarik, 2018). The improvement of living standards also encourages foreign direct investments and similarly creates opportunities for exports. Good purchasing power ensures that more citizens can afford local commodities, as opposed to relying on cheaper imports. Governments nonetheless have to actively ensure that they conduct proper budgeting to include deficit spending as well (Boutilier et al., 2015).

Disadvantages of Deficit Spending

Deficit spending has several detrimental effects as well. The first concern is that too much spending puts citizens at a credit disadvantage. The annual debt of the nation increases and many governments that cannot afford to pay their debt enter into a crisis. In Greece for instance, too much borrowing from the European Union finally had an impact when the country became bankrupted by the debt obligations. As a result, there was a government rush to reduce expenses and cut down on many social amenities (Ojede, Atems, & Yamarik, 2018). The poor management of the deficit spending led the country to one of the worst crises they have experienced in centuries. The currency hit all-time inflation, and many banks put a limit on the withdrawable amount from ATM machines. Greece's story is one case where deficit spending can be a concern. When a country defaults on their loan obligations, they face international credit listing that lowers their credit score.

Deficits in the budget can be at times artificial. Most nations have lean budgets that allow for borrowing below 50% of the annual budget. As borrowing becomes a habit; however, it is difficult to shake off the urge to imagine and implement many ambitious projects (Boutilier et al., 2015). The United States has actively spent a lot of its deficit borrowing on military funding, agriculture, and infrastructure. There has however been little income from these projects, and the government essentially has had to continue borrowing. Over time, the United States debt has ballooned to a greater than 50% deficit. The challenge with overreliance on deficit spending is that payments can also have a toll on the nation. The expenses that are prioritized often include repaying the debts so as to avoid blacklisting (Ramey & Zubairy, 2018). These countries essentially continue to live in a cyclic borrowing culture that digs them into more debt.

Crowding Out Effect

When a government seeks to manage a collapsing economy, they often inject capital into the public sector. Many of these governments establish businesses or concessionary projects that take away jobs from the private sector. This phenomenon is referred to as the crowding out effect (Husain, Datta, Virk-Baker, Parascandola, & Khondker, 2018). In essence, the government joins a market that has different players, and since they are able to offer subsidies and bailouts to failing businesses, they go against market principles such as competition and demand and supply. While it often comes as a necessity that the government bails out sectors such as banking, agriculture, and education which are key to many economies, the very act undermines private citizens who conduct businesses with these institutions or are part of the competing service providers. Too much deficit spending often leads to the crowding out effect. It is thus discouraged by many economists and has led to market collapses.

Conclusion

Most democratic governments hope to have steady economies and a generally happy population living in fairly high standards. Since most of the economies are unable to guarantee enough revenue for government infrastructure spending, money is often borrowed to stimulate markets and other areas of investment such as banking, education, and infrastructure in order to spark growth or increase capacity. Monies borrowed from other nations or international organizations often have a repayment deadline (Boutilier et al., 2015). It is a concern among countries with a rich spending culture to ensure that they always pay these debts on time. While deficit spending seems to be a concern and a risky affair, it has been proven as the best approach to growth. Nations, however, need to be wary of the spending habits and keep limits to the deficit budget so as not to grow large debts.

References

Bernardini, M., & Peersman, G. (2018). Private debt overhang and the government spending multiplier: Evidence for the United States. Journal of Applied Econometrics, 33(4), 485-508. Retrieved from https://biblio.ugent.be/publication/8560211/file/8590199.pdf

Boutilier, C., Caragiannis, I., Haber, S., Lu, T., Procaccia, A. D., & Sheffet, O. (2015). Optimal social choice functions: A utilitarian view. Artificial Intelligence, 227, 190-213. Retrieved from http://www.cs.cmu.edu/~./arielpro/papers/optvoting.aij.pdf

Husain, M. J., Datta, B. K., Virk-Baker, M. K., Parascandola, M., & Khondker, B. H. (2018). The crowding-out effect of tobacco expenditure on household spending patterns in Bangladesh. PloS one, 13(10), e0205120. Retrieved from https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0205120

Ramey, V. A., & Zubairy, S. (2018). Government spending multipliers in good times and in bad: evidence from US historical data. Journal of Political Economy, 126(2), 850-901. Retrieved from https://www.nber.org/papers/w20719.pdf

Ojede, A., Atems, B., & Yamarik, S. (2018). The Direct and Indirect (Spillover) Effects of Productive Government Spending on State Economic Growth. Growth and Change, 49(1), 122-141. Retrieved from https://onlinelibrary.wiley.com/doi/pdf/10.1111/grow.12231