Question

The USA is running up large budget deficits. Explain the long-term implications of budget deficits including the impact on the US Dollar.
How does it impact future generations what the government spends its money on today? Explain in light of what you have learned about economic growth.

Answer 1

1. A budget deficit is associated with the government spending more than its collected revenue. The Federal government deficit rose from $666 billion in 2017 to $779 in 2018. This will have long term implications of U S economy. The increased spending over revenue will cause a price hike in the economy. This price increase left the people with fewer amounts after consumption. Thus national saving will decrease. Again the government finds fund to meet the deficit through borrowing from the public. This borrowing leads to the fall in money supply which rise the rate of interest. This high rate of interest reduces the incentive to invest in private sector in longrun because of the high cost of borrowing. Thus the country faces low capital formation, low national output, low income and low standard of living. Then the people in longrun will be worse off than before.

The high price in the U S economy attracts more import. As the U S product are costly to the foreigners, export decrease. This will lead to the depreciation in the value of U S dollar. To offset the deficit in current account the government will compel to borrow from foreign countries or international monetary institutions like IMF. This will increase the financial obligation of the Federal government and large burden on the future generation.

But the high interest rate domestically may attract the inflow of foreign fund. But this depends upon the difference between the return from the domestic market and foreign market. In short the deficit budget has adverse consequence on the national economy.

2. When the deficit is covered though borrowing this will impose financial burden on the future generation. The government has to pay the borrowed fund with interest in future date. Thus in future the government imposes more taxes on the future generation. Thus the financial burden on the future generation increases.

The increased spending at present by the government causes the prices to increase in future. Thus inflationary pressure occurs in future. So a present budgetary deficit badly affect the future generation.

If the government uses the budget deficit for the construction of schools, roads, railway and other infrastructure facilities, the future generation will be benefitted. But if the borrowing is used to fiancé current consumption, the future generation will not get any benefit from the increased spending by the government. They simply bear the tax burden.

3. The benefit of deficit budgeting depends upon how far it is growth stimulating. It is upto the government to decide to spend the money in productive channels or unproductive channels. If the government spends the money on unproductive channels like social security measures and other welfare programmers, the increased money will spend without corresponding increase in output; this will have larger inflationary pressure and crowding effect in the economy.

The government has other option to invest the money. They are directly productive activities like invest in government undertaking which increase the productive capacity directly. In such case there will be no fear of inflation. The yield from such investment will be used to pay off the debt and the present generation will be suffering a little through increased taxation. There will be no burden on the future generation. Secondly the government can invest in indirect productive activities like roads, railway, canals, electricity and irrigation facilities etc. Such investment will create necessary infrastructure in the economy and induce the private domestic investment and foreign investment. In such case both burden and benefit transferred to the future generation. The economy will enter into the phase of economic development.

The U S government is frequently resorting to deficit financing due to the fact economic growth is the result of increased spending. The government has various monetary and fiscal measures to control unwanted inflation. But the targeted inflation must be between the finger and eyes.