Question

Trace the short-term and long-term fiscal consequences of government expenditures being greater than government revenue. What is one reason to worry about the national debt? One reason not to worry?

Answer 1

a) Short-term consequences of the high fiscal deficit: the Fiscal deficit of any country will lead to an increased income and higher demand in the nation. In the short run, a high fiscal deficit will lead to a high inflation in the nation. Apart from that, the income of the people will lead to higher interest rates in the nation and it will crowd out the private investment.

In the long term: High fiscal deficit will amount to a vast public debt at a higher debt the interest paid to service the debt will be high and the economy will have to pay a large portion of their budget only to service their debt leaving very less for the development work.

b) The national debt will lead to a greater outflow of budgetary allowance to service that debt leaving less room for other development work.

The national debt will only affect the economy if there is a slowdown and the currency reserves are low, If the debts were used for capital development it will generate more capital and the debts can be paid back easily.