Question

do you think it is correct policy that the federal government is not required to finance all of its expenditures with tax revenues and is allowed to borrow ? what are the implications of this policy ?

Answer 1

Whether it is correct policy for federal govt to borrow or not,depends on the purpose for which the borrowing is made. Consider this example - If the govt wants to borrow so that it can subsidize the consumption of household sector then it certainly isn't advisable to borrow. The govt will bear the burden of the debt and the interest on such a debt. Such debt will have to financed in future. It is likely to be financed by increasing taxes in future or conducting further borrowing. If taxes are increased in future then the burden will fall on future generation. If further borrowing is conducted even then it is counterproductive.
However, if the debt is taken for development of infrastructure then borrowing may be a good idea. In such a case, the govt must be able to see some returns on such an investment. For e.g. If govt builds a toll that facilitates trade and commerce, then it can finance the debt by charging a small fee.

Too much borrowing implies that the citizens will have to pay higher taxes in future. It can also be inflationary if govt spends too much in the economy. Too huge debt without any corresponding cash flows could result in debt crisis where the govt may not able to pay off its debt obligation and it can put the economy in a standstill as it happened in Greece recently.