Question

How budget deficits and national debt are defined?

Is it a good policy for the government to create budget deficit? Why and why not?

Answer 1

1.Budget deficit occurs when government of a nation's expenditure exceed its revenue Budget deficit is the difference between total receipts and total expenditure . If the borrowings and other liabilities of government are added to budget deficit we will get fiscal deficit. A government faces budget deficit when it spends more money than it takes from taxes and other revenue of government. National debt is also called public debt. National debt is the total sum of a government budget deficit. National debt is a debt which a state or governmenr owes to people or institution with in the country or nationals of other countrt. National debt can be divided as internal debt and external debt

Internal debt is part of government debt in a country that is borrowed from lenders with in the country. Government can borrow from commercial banks other financial institution as a part of internal debt External debt is the a part of government debt which a country borrowed from foreign creditors including world bank and other international financial institutions

2. A higher budget deficit is not a good policy for government. Because it accumulates level of national debt. Government has to take more than half of the national income to pay interest payments of debt. Higher government spending results crowding out of private investment. It discourages private investment.Countries with large deficit may struggle to sufficient investors to buy bonds Budget deficit creates inflationary pressures in economy. Higher budget deficits may adversely affects the confidence level of consumers and firms fear future tax rises or higher interest rates.