Question

What are the disadvantages if the government expenditures are finances by budget deficits?

Answer 1

Budget deficit means that govt. Is spending more then the revenue that is total expenditure exceeds total revenue . So the govt has to borrow money to finance the deficit.

Following are some disadvantages if govt spending is financed by budget deficit -

1 debt trap - fiscal deficit will increases public debt or government's debt and thus cost of servicing this debt increases .

2 tax hikes- as in future taxes must be increase or there must be less to spend on important economic activities.

3.Long term interest rate might increase which will crowd out private sector investment . As govt will increase rates on the bonds to persuade people to lend money to it.

4 As spending increase, both demand pull and cost pull inflation will increase as money supply in the economy will rise.

5. Govt will borrow money from foreign and if there is some emergency situation then costs of investment will increase. This failure of governments

6. Foreign dependence - as govt will depend on foreign nations to borrow money

7. Discourage foreign investors to invest in the country .