Question

What are ways that governments are different from households? How do these differences result in needing to treat government deficits differently than households being in debt?

Answer 1

Government is different from households because of the size. The basic difference is the size ie the government needs to run the whole economy while the household is a single unit of few members.

The decisions of government leads to inflation, unemployment or other such issues while the decisions of household affects just the members of it and is usually less in scale and intensity.

Eg: if a government decides to reduce the expenditure, then it would lead to reduction in aggregate demand, fall in jobs etc and would impact the whole economy.

While if the household decides to reduce the expenditure, it would need to reduce the unimportant expenses, which is easier than government.

Government deficit could be reduced by either increasing taxes or reducing the expenditure of government. The government is the institution running the economy and hence the change in taxes could be easily done by order and law.

While the households though can reduce the debt by reducing expenditure, but they cannot increase their incomes more easily. They have certain physical constraints or the availability of skills and job due to which the Income cannot be easily increased.

Government can also finance its deficit by seignorage or printing of currency. This ability is not present with the households and hence they need to pay back the debts from the income they earn.

Governments have usually long time periods to repay loans and hence could borrow more from other nations and international organizations while households are restricted to banks and moneylenders who might not be willing to lend money when the earlier loans are unpaid.

Hence the government deficit is different from household debt.

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