Question

5. The level of government debt is a growing concern for the current Australian Treasurer who has the responsibility of managing the government budget. Summarise the key arguments on the debate around Australian government debt and deficit for the Turnbull government. Your summary must address the following; what is the major concern of running government deficits, what is the economic reasoning to have a balanced budget and when might a budget deficit/surplus be ok? Conclude by briefly discussing what policies you would suggest Scott Morrison implements in order to balance the budget and why. The summary should be at least half a page in length (again, please do not write in the form of bullet points). No need to list references, but please do not copy and paste from whatever you found on the web. We can easily detect this in our system!

Answer 1

Summarise the key arguments on the debate around Australian government debt and deficit for the Turnbull government. Your summary must address the following; what is the major concern of running government deficits,

Fiscal deficit refers to the mismatch between the government revenue and expenditure. Here, government expenditure tends to surpass the revenue of government. Government looks for debt for balancing mismatch between expenditure and revenue. Present Australian government debt is close to the $ 517 Billion and expected to rise due to projected cut in income tax as has been promised by government. Following are some major concerns about rising debt and fiscal deficit of government:

• Burden on growth: high debt might lead to downgrading of credit rating and fall in confidence of investors in economy. All these factors would drag down investment and economic activities. Ultimately, these factors would cause drag on growth of economy.
• Rise government debt by borrowing from open market shall reduce the availability of fund for private investors. Ultimately, there shall be uptick in interest rate. Finally, private sector investment would be crowded out.
• Excessive debt and unproductive expenditure by government fan up inflationary pressures. Rise in inflation dilutes value of money and poor people are severely affected in form of reduced purchasing power.
• High fiscal deficit and debt further, act as burden on future generation.

What is the economic reasoning to have a balanced budget

It is advised that during the normal economic condition, government must aim at achieving balanced budget. Balanced budget does not produce undesirable repercussion on private sector and reduce the profligacy in government expenditure. It reduces government debt and future crisis can be easily tackled by manipulating budget.

and when might a budget deficit/surplus be ok?

Boom period is characterized by the high economic growth, inflation and low unemployment rate. In such situation, government must maintain surplus budget.

On other hand, recession which causes unemployment and deflation must be countered through budget deficit.

Conclude by briefly discussing what policies you would suggest Scott Morrison implements in order to balance the budget and why

Following policy measures can be taken to reduce to fiscal deficit and debt:

• Government must reduce expenditure on subsidies and social sector wherever it is democratically and ethically possible.
• Government should raise tax revenue wherever it does not affect poor class and investor negatively.
• Austerity measures can be taken for time being to tame over debt and fiscal deficit.