Question

To eliminate deficit spending and reduce public debt, some politicians and economists have proposed a Constitutional amendment requiring a balanced federal budget.

In your initial post to this discussion, respond to each of the following prompts based on what you’ve learned in this module about deficit and debt.

What present and future benefits might result from an amendment requiring that each year's budget be balanced?

What limitations or costs might result from such an amendment? Describe alternative legislation that might eliminate chronic deficits but have more desirable effects on the economy.

Answer 1

ANSWER:

1) Generally, a balanced budget legislation will bring fiscal discipline in the policy decisions, Then it will bring the government out of the debt and will induce stability within the economy. Also it will ensure that the government doesn't undertake the popular measures to appease the vote bank and also diverts the resources to the various sectors with the highest need for the intervention. And the benefits that are obtained in future will be from the reduced tax rates as any present deficit is financed by raising revenue in the future. Reduced future tax rates will also create expectations in present also which will induce people to save less and consume more. Thus, the propelling the aggregate demand in the economy. And also a controlled budget will also keep the interest rates and inflation in check.

2) Here, the drawbacks from such a measure comes from the fact that the government will have less room to take counter cyclical measures during the economic slump. Keynesian economists believe that during the slowdown, when all other wheels of the economy are jammed, then the government must undertake expenditures to raise the aggregate demand. However, when the government is bound by the legislation, then they have legal constraints and can't boost economy by raising the expenditure. The legislation also means that government will have to depend on private players to implement large infrastructural projects, may be even for the strategic sectors.

3) An alternative prescribing which might include benefits of the fiscal discipline as well as allow the government some room can be:

a) A legislation prescribing a range within which the government deficit should remain. This will allow some room and also keep the deficit in check. The public will also be able to maintain the good and positive expectations.

b) Also allow for exigencies in the legislation. This legislation may allow the government to undertake the speedy spending if recomended by the economists to take up the economy out of a slump. Also such measures however must be utilized in only special situations with required accountability.