Deficit Spendind (Term Paper Sample)

.Introduction:
Deficit spending occurs when government expenditure exceeds government revenue (Robert Mudida,). Deficits spending as an income generating expenditure does Pump priming which involves stimulating private investment through giving small doses of investment in the economy. and Compensatory spending means that deficit Spending can be used for paying off and minimizing tendencies towards over-saving and under-investment. According to the Keynesian perspective, deficit spending may not be in itself a problem.during time of unemployment and recession a government may deliberately allow deficit spending with the aim of stimulating the economy.( Robert M 2003 )
Advantages/Uses of deficit financing
For prosecuting a war: During the state of war, the government has to finance the purchase of arms and ammunitions through deficit financing. Deficit financing during war is very injurious for the economy. Private investments and savings are at their worst level.
For fighting depression: Deficit financing can be really helpful for the government during the period of depression. It can stimulate private consumption and investment. The government can increase its own expenditure on public works programme.The government’s tax revenue remains constant but its expenditure has gone up, therefore,the deficit has to be met by borrowings. In this case, as government investment rises, the level of national income and employment alsoincreases by more than the proportionate increase in government investment. Deficit financing can be used to create additional employment, when the economy is suffering from a deficiency of effective demand.
For financing economic development: The economic problems faced by underdeveloped countries are different from that of advanced countries. In advanced countries, the task of capital formation is in the hands of private entrepreneurs but in poor countries there is a dearth of people willing and able to undertake entrepreneurial functions. Therefore, it is the government’s responsibility to boost up investment in public sector, generate revenue from it and encourage people to save and invest. But, in a country, where a majority of people areliving at the subsistence level, the margin between income and consumption is very low so that the voluntary savings cannot provide sufficient resources for development. The government may attempt to
increase the volume of resources by additional taxes. Because of extreme poverty of the great mass of the people, additional taxation beyond a point raises problems, both economical and political.
Disadvantages of deficit spending
An increase in federal government borrowing implies that national debt incrases.it could be argued that internal debt poses a problem because of interest payment burden. The paymnt of interest may have to be funded by tax increase which raises the controversial issue of disincentives.(Robert M ,2003)
Transfer of resources from higher-valued private activities to lower-valued government activities. With government spending already at 41 percent of GDP, new spending will likely have a negative return, which will reduce output.Creating pressure to increase taxes in the future, which would reduce growth. Higher taxes impose “deadweight losses” on the economy of at least $1 for every $2 of added revenues, as. increasing federal debt, which creates economic uncertainty and a higher risk of financial crises, as Europe’s woes illustrate. Research indicates that economic growth tends to fall as debt rises above about 90 percent of GDP, as discussed below.
There is always a time lag between Govt. investment and the output from the projects. Increase in supply of money creates inflation, by which poor people are badly affected. Their purchasing power reduces to a greater extent whereas profit margin of businessmen increases. Society is divided between haves and have-not. Increase in prices of domestic goods causes imports of cheaps goods whereas domestically produced goods high prices reduces the export earnings, which results in the adverse balance of payments position. Cost of production of industrial goods increases with the increase in...