Question

f) Following on from part (e), explain why a government accumulates debt? Should Australia be worried about running a large budget deficit and accumulating such a large debt in current economic conditions? Provide reasons to support you answer why or why not. (2-3 sentences)

Answer 1

F.

The government accumulates debt, because it has expenditure programs that involve more money than the funds it receives as revenues. So, to bridge the gap between expenditure required to be made and revenue collected, the government takes debt as a part of the deficit financing route to accumulate the debt.

Australia should not be worried about these large deficits and accumulation of debts, because it is going to boost the aggregate demand in the economy that will also help create new jobs and build a positive outlook about the economy among the investors. It will help economy recover from these problems. Further, the large deficit is also due to spending on development programs, today that will bring benefits in the future. So, if money not spent today, will cause stagnancy in growth in the future. So, the Australia should not be worried about these large size deficits and debt , because purposes of these spending are to develop the new avenues of growth, demand creation and making the economy move in a positive direction.