Question

The only way to pay down the national debt is to have a budget surplus. The only way to have a budget surplus is to increase tax revenues (increase taxes), cut government spending, or both. When is the best time to increase taxes and cut spending? So, when is the best time to start paying down the national debt?

What do you think will happen if we try paying down the national debt during a recessionary gap (when we should be running a budget deficit)?

Answer 1

The best time to increase taxes and cut government spending is during a period of boom.A boom is characterized by an economy working at full or near-full capacity, strong consumer demand, low rate of unemployment .One of the ways to increase tax revenues is by widening our tax base.

The best time to pay national debt is when we have primary surplus. Primary surplus is given by government's total receipts minus government's current expenditure(that is we exclude interest payments on debt ).So ,when primary surplus is positive we have funds to start clearing our debt.This usually happens in a period of boom.

During recessionary gap, economy is slow.Consumer demand is less and there is high level of unemployement.This is the time when the government needs to increase its spending and use tax cut measures to stimulate the economy.In order to do this the government has to borrow this increasing the deficit .Hence it is a bad idea if we try paying the national debt during a recessionary gap.