Question

In what sense does repayment of the federal debt constitute a redistribution of income among citizens? How can deficit finance influence political equilibrium? Has deficit finance been associated with increased federal investment in the U.S.?

Answer 1

Redistribution of income among citizens through repayment of the federal debt :

Federal debt/public debt is borrowing by government to meet its expenditures. The debt can be taken from internal (within the country) or external (foreign) sources.

The repayment of the debt can play an important role in redistribution of income among citizens because to finance the debt government impose taxation on people. If the taxes are imposed on general goods and services they will increase the tax burden on poor leading to reduction in their income and will lead to increase income of rich. It will increase income inequality. If government imposes taxation on income of rich people it will reduce the income inequality and redistribute income.

Influence of deficit finance on political equilibrium: deficit financing means government expenditures are more than revenues. Political system is in equilibrium when there is deficit budget as majority of voters prefers deficit financing rather than balanced budget. As deficit financing assures public that the government is spending enough on their economic development and social welfare so to maintain the trust of people on the government political systems are always in favor of deficit financing.

Yes deficit finance has been associated with increased federal investment in the U.S.- because government’s investment on developmental projects, infrastructure, health services, education and other welfare works increases the expenditure of government leading to deficit in its budget.

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