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On budget deficit - Essay Example

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On budget deficit

The economic recession which broke out in the middle of 2008 had resulted in a wave of debt in several advanced economies along with the USA. When government spends more money compared to the amount it receives through tax, it requires borrowing to cover the gap. Organisation for Economic Co-operation and Development (OECD) has predicted that government debt will increase seriously by unmaintainable levels in advanced as well as emerging economies within next 25 years. It is estimated that the standard principal deficit in the USA will be 2% of total Gross Domestic Product (GDP) in 2015 and will increase to 7.7% of total GDP by 2035. The baseline debt of the USA was 65% of total GDP in 2010, which is estimated to become 213% by 2035 (Gagnon & Hinterschweiger, 2011). Budget deficit occurs when government expends excess amount compared to what it gains through taxation. The opposite term of budget deficit is budget surplus when the outgoings are less than the receiving amount (Investopedia ULC, 2011). Even few years back, the US had budget surplus but due to the impact of the crisis in present days the US economy is running with budget deficit of 10% on GDP. It is expected that the budget deficit will decrease to 7% of GDP and by 2017 the government will seek to reduce the budget deficit to 3% of GDP (Paletta & Boles, 2011). Deficit reduction plan is helpful for advanced economies to deal with the economic recession. Several nations have implemented the debt reduction strategy to maintain a justifiable fiscal budget and to reduce the debt. Deficit reduction strategy can result in change of major economic and monetary players. It can help to achieve prospects of creditors which can ultimately reduce the financing budgets. It can be achieved by minimizing risk premium through ‘higher long-term interest’ (OECD, 2010). Deficit Reduction in Greek Government The Greek government had followed the deficit reduction plan in order to reduce their huge amount of deficits. In the year 2009, the deficit of Greece was 15.4% of GDP. The government of Greece had estimated a deficit of 9.4% in 2010. In order to reduce the deficit, Greece had adjusted its economic settings. The objective of deficit plan of Greece is to reduce government budget by decreasing expenses on public pays, annuities on public as well as private segments, and raise the revenue by increasing the rate of Value Added Tax (VAT), and taxes on gasoline, alcohol, and tobacco products. Greece’s deficit plan was to receive financial support from the EU nations and International Monetary Fund (IMF). Through this financial support, it is estimated that Greece can improve the economic growth and reduce the debt crisis. But, the deficit plan can have certain negative impacts on the economy. Reducing the monetary expenses can lead to fall on value of currency and stock market. Increasing taxes can also harm the lifestyle of people and can impact on the demand of products which may increase the problem of crisis. However, those who support the deficit plan say that delay in consolidating debt can worsen the economic condition even further (McCully & Webb, 2010). Deficit Reduction by Irish Government The debt crisis of Ireland is not similar as Greece, as it did not occur due to excess expenditures; rather it had occurred due to promising housing bubble in certain Irish banks. In order to crush budget deficit, Irish government had developed ...Show more


The economic recession which broke out in the middle of 2008 had resulted in a wave of debt in several advanced economies along with the USA. When government spends more money compared to the amount it receives through tax, it requires borrowing to cover the gap. …
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