Question

In your opinion, should the government cut its spending levels, and if so, what specific area should be cut first? Explain your reasoning. What could be the possible unintended consequences of such a cut?

This discussion covers 3 skills.

• Describe government spending at federal, state, and local levels.
• Describe how federal deficits and the national debt relate to the economy.
• Describe how automatic stabilizers respond to economic events.

Answer 1

Govt. has to achieve following macroeconomics aims: Economic growth, Economics development, price stability, Income equality, Employment and balance of payment stability. For these they have certain policies like demand-side, supply-side and exchange rate policies with them.

When govt. earns more than spending then it is fiscal surplus. If spending is more than earning then it is deficit. Generally govts. have fiscal deficit as due to welfare achievement pressures they spend more. For this 'more' spending they borrow from its own people (internal debt) or foreign agencies/govts.(external debt).

Govt. spending are done at three levels: local levels(gardens), state levels(dams) and federal levels (defense). If govt. spending are cut then it is contractionary fiscal policy. it may shift aggregate demand to left as income of people dependent on govt. spending decreases and they start spending less. However, it will decrease interest rates in an economy and private investors will invest in the market. This move will generate more jobs through private investments.

Automatic stabilizers in the form of unemployment benefits and progressive taxes will make sure that economy has a certain speed. Progressive taxes will decrease tax liability during recessionary pressures and unemployment benefits will maintain purchasing power.

In my opinion, spending on defense is not productive and this can be diverted to creation of human capital. It will cretae more positive impact as economic and social standards of living will go up.