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In: Economics

“Chronic budget deficits mean ever-accumulating, unsustainable public debt.” Do you agree? Explain why or why not....

“Chronic budget deficits mean ever-accumulating, unsustainable public debt.” Do you agree? Explain why or why not. Make sure to address the following questions in your essay: a. What is the relationship between public deficits and debt? b. What is meant by “sustainable debt”? How do you know whether the public debt sustainable? c. How is it possible for chronic deficits and sustainable debt to coexist? d. Is it possible for sustainable debt to transform into unsustainable debt? e. How is monetization of deficit related to debt sustainability?

Solutions

Expert Solution

US present fiscal deficit has increased significantly to 3.2% of GDP and economy is already moving around natural rate of unemployment. Rise in public deficit implies that government is spending beyond its means. Hence, as public deficit rises, so debt of government. Both are positively related.

Sustainable debt refers to situation where government has sufficient revenue income to service debt obligations. US public debt is around 100 % of GDP and government still has enough revenue to service its debt obligations.

Chronic deficit and sustainable debt co-exist if government uses its debt for productive purposes and expects such expenditure to create sufficient revenue over long run.

It is possible for sustainable debt to transform into unsustainable debt if government continues to increase its deficit and reduce prospective sources of revenue. Recent tax concession by the Government may increase its problem of unsustainable debt.

Monetisation of deficit creates revenue source for government and its impacts are felt by the general public. hence, monetisation of deficit makes debt sustainable. Such actions are usually recommended in the event of deeper recession.

Rahul Sunny answered 2 years ago
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