High Budget Deficits - Essay Example

? High Budget Deficits A deficit is any amount short of any fixed reference point. This may be amounts short of therequired spending by the relevant governments; they may as well be the amounts less of the expected revenue collection from the revenue collection tools (Associated Press 2010). Our reference point, which is the government deficit, entails: deficit spending by various governments, there is primary deficit which are deficits arrived at after deductions of interest payments are deducted and finally we have both structural and cyclical deficits which are part and parcel of the public sector deficits (BBC 2010). Budget deficits, on the other hand, are the amounts in deficit of what the individuals spending, government or even a companies or corporations spending are short of the planned incomes from the entities sources. In another name, deficit spending may be the other terminology of budget deficits. Over the past years, budget deficits of countries, most so the developing countries, have attracted a lot of publicity. This has been majorly witnessed over the past two decades of which financial restructuring and turbulence have been witnessed (Associated Press 2010). The country where the impact is witnessed is attributable to the assorted financial ills bedeviling such countries; the countries base their expenditures from high debts due to extensive borrowing, high and ever growing rates of inflation and investment problems attributed to poor investment and their poor growth performance of such investments (Associated Press 2010). The poor government financial position, most so in regards to budgets, results to poor economic growth rates. The factors that fuel these rates are the poor growth of government revenues due to poor collection measures and tools. The budgeting process, which is not well structured, is also blamed for it in a major proportion. Others include the levels of economic development, which is low and unstable. World macroeconomic shocks, like the Great Depression and poor ways in which the government controls its expenditure, have in the past been witnessed to impact on the government financial position (Associated Press 2010). The methods used to finance any form of budget deficit will always result into an imbalance in one way or the other. For instance, if local borrowing is used, then the crowding out effect of the private investments occur leading to the collapse of the private firms which may even end up causing more harm to the economy. The budgeting process of most countries has so many loops and is, therefore, responsible for most countries budget deficits apart from the government participation in most economies and even the other factors as discussed above. According to reports, it is in record that budget deficits have several impacts on some economic sectors, such as private consumption, private investments, the T-bill rates, current account, and even money supply into the economy (BBC 2010). The aspects that the deficit has impact on as discussed above are major pillars for the measure of any economic growth of a country. Budget deficits have been recorded to reduce money supply into the economy; this majorly results when domestic borrowing is given an upper hand (BBC 2010). Intensified domestic borrowing may also lead to the collapse of private sector firms as a result of crowding out effect. I may, therefore, comfortably conclude that budget deficits in any economy are harmful to economic growth rates since they lower the growth rates. The causes of budget deficit are many and they include most major government stakeholders (individuals, companies, and corporations) who evade taxation. It is in record that many US firms use the fair share of the infrastructure by the government but they don’t pay their fair share of the taxation; they use the roads, defense, grants and even emergency services (BBC 2010). Despite the companies making huge profits from the countries resources, they try as much as they could to evade taxation. This places a burden on the smaller and local businesses, which try to compete with them on a level playing ground. This results into huge budget deficits by the government. Secondly, recession has also caused budget deficits in the past due to drastically reduced tax revenues. Decreased tax revenues make the government increase its spending in a bid to ensure that the economy is made stable. The government is given a tough role of making sure that revenues equal to the expenditures, price stability should be ensured to curb inflation. Other aspects of the economy must require stabilization. If these deficits are not dealt with in time, then the interest rates could shoot drastically, inflation goes up too and it may lead to the crush of the country’s currency. The government can take an action of creating employment opportunities by putting into position public projects; it can as well reduce taxation, which has an impact of stimulating the economy (Democratic Leadership Council 2010). Just like, it is significant when a business is operating at a deficit where executed expenditure is much higher than the expected revenue, hence, a possibility of the occurrence of a loss. The same is applicable to a government, but in the case of the government, it all revolves around the management of the financial affairs of the country (Democratic Leadership Council 2010). Unlike businesses which can immediately cut down their expenses even at the mid of its operation period, a government is not able to cut such expenditures that abruptly since this can negatively affect their operations and even derail the governments objective of service provision to its citizens (National Priorities Project 2010). Therefore, in case of a budget deficit in government, the instantaneous effect is the negative perception and relations with the public. The public instantly feels the pinch of the deficit and even views the government to have failed. The reputation, credit rating and even the ability of the government to borrow money is seriously impaired and, hence, the country can seriously wallow in debt since it does not have extra places to borrow more to finance its debts. The immediate impact of this is drastic reduction in economic growth rates, which are harmful most so to upcoming economies (National Priorities Project 2010). As the government tries to make an effort to bring the budget at equilibrium, it would do this by trying to raise more revenue through excessive taxation. Of which taxes are imposed on both the citizens and the businesses. In addition, the government will also try as much as possible to lessen their expenses through reduced expenditure programs. The above efforts in as much as they would appear to be of great assistance, they are in themselves reacting against one another and counterproductive as well. Therefore, instead of helping alleviate the problems, they themselves add more onto the economic problems of the country and its people (O'Sullivan et al 2006). It is, therefore, prudent to mention that it matters if taxes are lowered in times of deficits to relive the people from economic constraints. Increased defense spending does not have a much negative impact since they are one of the mandatory expenditures that must be incurred by the governments. More job training programs only adds value to the countries expertise, hence, increased means of survival in case of hard economic times (O'Sullivan et al 2006). The above factors do not matter much since they are the reverse of the efforts that the governments normally try making to alleviate the problems. A deteriorating economy most so during recession and contraction of the economy during a budget deficit can never be solved by using monetary and fiscal tools such as increasing the rates of taxation imposed on citizens or cutting down expenditures. These as have been realized would simply work against the developmental progress of the nation, hence, lengthened economic stagnation since in such periods both the government and the private sector holds back on investment (O'Sullivan et al 2006). The government should instead embark on expansionary economic and monetary programs during periods of fiscal deficits and deteriorating economy. Such activities would rapidly bust the number and nature of the economic activities, which would propel economic activities from its contracting face. The expansionary policies through expansionary monetary programs is achievable if the government increases money supply (M3), hence, high velocity of money in the economy propagating economic activities through investments by citizens on income generating activities which in turn would add to the governments revenue. To increase money supply, the government is entitled to borrow against its future taxes, it is done through trading of its long term securities and bonds to the central bank of the country, the central bank in turn issues local money to the economy to help avert the crisis (Suddath 2010). Budget deficits, depending on the nature in which it is handled, can in the end affect the economy either positively or negatively. Positive, it can lead to a pull up of the economy from a state of stagnation and initiate its growth through a robust of activities. If wrong policy tools were employed in handling the effects of a budget deficit then much slower and even a halt in the economic growth would be realized (Suddath 2010). It is vivid that the most fundamental cause of budget deficit and the national debt is recession. It is, therefore, very clear that at such times the revenues for the federal government fall and, therefore, expenditure should be highly encouraged since it would stimulate the economy through a boom of economic activity. In case recession doesn’t come to an end, then increased spending is not the best option to save the economy, hence, better policy tools and instruments must be picked for use. In the United States, budget deficits and government borrowings are key issues. They are because of four major causes, which have continued haunting the US economy over the recent past. For the federal state, the problem has since been noted and is being dealt with appropriately (Suddath 2010). References American military spending is 43 percent of the world `total. (n.d.). dlc.org. Democratic Leadership Council, 18 November 2010. Federal deficit, surplus, nation debt. (n.d.). nationalpriorities.org. National priorities project, Inc., 29 November 2010. Foreign Demand for US Debt Drops by Record Amount. (2010). news.bbc.co.uk. British Broadcasting Corporation, 29 November 2010. O'Sullivan, A. & Sheffrin, S. M. (2006). Economics: Principles in Action. Boston: Prentice Hall. Recession, Bailout Costs Push Deficit to record. (2009). msnbc.msn.com. Associated Press, 29 November 2010. Suddath, C. (2010). A Brief History of the U.S. Deficit. time.com. Time, Inc. 29 November 2010. Read More