Question

if it is projected that the US budget deficit this year will be 5 trillion or more which increases the debt by the same amount by far the largest increase in our history. what are the advantages and disadvantages of this level of borrowing

Answer 1

In the current Corona Virus Pandemic, the United States and its economy are seen to be worst hit. With cases being extremely high and beating all records. The country as a result has been in economic lock down and the overall demand for all goods and services has declined sharply. The government needs money, to be able to get out of this trap wherein low demand would mean low supply and increased unemployment levels in the country.

For this, it borrows funds, to be able to meet with the expected expenditures and so as to boost the economy once it reopens. The following are the advantages and disadvantages of the borrowing or debt which the government has taken to facilitate growth in the economy.

Advantage: -

The borrowing of funds, increases the liquidity in the market, as the government spends money towards infrastructure development, health care facilities, education etc. The end result is that the market is facilitated and can grow back at its normal rate.

It helps in improving the quality of living in a country which is hit so bad by the disease and encourages companies to come in and seek profits. The end result is that people can then demand more goods and services due to the increase in supply and demand for the same and the economy can stabilize.

We can conclude by saying that the extra availability of cash inflow with the government gives them the opportunity to invest and invoke demand in the economy. This leads to consumer demand returning back to normal which also helps the country in raising prices and supply which have fallen drastically during recent times.

It is essential during economic crisis that recessions can be handled through these tools which help in growth and increased payments to workers and helps in avoiding the menace of economic unemployment.

Disadvantage: -

The core disadvantage is that the extra money generated through borrowings increases the liability of the government. If this liability is not used properly it could result in default risk in which the government is left with no choice but to print new currency to pay off its debts. As this happens in an economy, the overall inflation rate rises and goods become beyond the reach of common people respectively.

Please feel free to ask your doubts in the comments section if any.