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In: Economics

Macroeconomics Government Budgets & Fiscal Policy and The Impacts of Government Borrowing. Discussion-based post The national...

Macroeconomics

Government Budgets & Fiscal Policy and The Impacts of Government Borrowing.

Discussion-based post

The national debt has been debated extensively in recent years. Candidates for public office often advocate eliminating the national debt. Is eliminating debt a good or bad thing? Why?

Investigate what would happen if the debt were eliminated or if it were continued. How might economic growth be affected?

Solutions

Expert Solution

Eliminating debt, means reducing government spending or increasing the revenues. If the government reduces spending, then all the development programs, meant to fuel the economic growth will be withdrawn. It will be a setback to the economy, as government cannot withdraw from the social security programs and if done, then it will create chaos. If the government increases the revenue by increasing the tax, then it will further create problems to the people and AD will suffer. Hence, eliminating the debt should not take place as the statement is said, rather it should be strategically panned to reduce the debt so that economy, its people, society and next generation don't suffer.

The true planning should be based on the premise the spending done today (that accrues the debt), should be equal to the increase in benefits taking place in the future (in terms of increase in income, revenue and tax revenue). If it is not done, then national debt will keep increasing, becoming bigger % of the real GDP and putting additional pressure on the economy.

If debt were continued, then more and more interest will be paid to the bond holders. Besides, it will put pressure upon the people to pay more taxes so that debt are paid. If debt is eliminated, then it will stop funding to all the development and welfare programs and poor section of the society will suffer and chaos will be created. Further,  aggregate demand will also suffer and unemployment rate will increase. So, eliminating the debt, will also put negative impact upon the economic growth.


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