..."Deficit Spending Introduction Deficit spending has become one of the highly discussed concepts in the corporate market. Deficit spending refers to the amount by which the spending of an organization exceeds the revenues in a particular period of time (William and Alan, 2005). The term can also be applied to the budget of an individual, family or government. The term can also be used to refer situations like imports exceed exports and liabilities exceed assets. Taking a loan that has to be repaid after certain period of time, say two years, at low interest rate to use the money on important things can be considered as an example for deficit spending (Oxley & Martin, 1991). If the loan taken by the individual right now is more important than the interest money that he or she spends on interest, it can be considered as a good deficit spending deal and vice versa. The deficit spending can be explained by referring to the activities of Federal Government. When then expenditure exceeds its revenues, the government will try to borrow, likely from foreign governments, to finance the excess spending needs (William and Alan, 2005). Governments will operate in deficit spending with the anticipation that the increased government spending will stimulate economic growth. Advantages of...
Words: 1001 - Pages: 5
...Deficit Spending Often as Americans it’s easy to place blame on the Government for spending more money than it actually makes, however the citizens of this country are equally at fault with overuse of credit cards. What is deficit spending and how does it work? A similar example to somewhat relate with can be explained by living about ones means. Spending more money than what is available is risky, furthermore it isn’t living within your means. A government can be at fault for spending more than it receives back just as a person can. Spending money can cause short term setbacks, yet if the long term yields returns it is justifiable. All deficit spending is not bad however, as it takes money to make money furthermore risk versus reward is sometimes...
Words: 726 - Pages: 3
...believed more like Gordon Geiko that “Greed is good”, this book helped me see that self-interest is simply the most consistent of motivators.. Another economist that I found rather compelling was Maynard Keynes. The simple fact that he struggled to stay out of debt and had creditors coming after him constantly made me chuckle as I imagined this had a big impact on his ideas and theories. I understand better the Keynes theory now and realize that “we are all Keynesian” in a way. One thing I never understood before was how politicians could campaign on spending money without promises to pay it back. This section of the novel helped me understand that Keynesian economics is not only spending to spur on the economy but it is also saving and reducing the deficits when the economy is strong. This is a very compelling argument and altered the way I think about economics. It helped me relate it to my own life; I am currently spending more than I take in as a student paying for an education in the hopes that one-day I will be able to have...
Words: 493 - Pages: 2
...John Maynard Keynes’ influence and ideology Even today John M. Keynes’ ideas remain crucial to the most important debate of our time: how can we escape from the economic crisis? Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt? Despite Keynes’ avid support for the free market, his theory is one strongly based on the mixed-market economy. “Keynes said it was possible for governments to come in and make markets work better... Keynes saved capitalism from the capitalists.” - Prof. Joseph Stiglitz Keynes’ theory opposed Adam Smith’s metaphor of “the invisible hand” – which envisages a self-correcting economy, in the form of the self-regulating behaviour of the market - due to individuals' efforts to maximize their own gains in a free market which benefits society, even if original ambitions include no benevolent intentions. Instead Keynes said that capitalism doesn’t always work on its own accord, but that government intervention is sometimes necessary (especially during periods of recession – which Keynesians see as an “economic malady” rather than a normal part of the business/trade cycle. Keynesian theory in modern macro-economics Alistair Darling MP, Chancellor of the Exchequer, 2007-2010 – “The dominant thinking in Europe at the moment is exactly repeating the mistakes (I believe) that were made at the end of the First World War”. This statement was made...
Words: 1016 - Pages: 5
...While researching, I ran across a small article titled A Review Of Keynesian Theory. This particular article is an overall review of Keynes theories of economics as well as arguments against his philosophy. The website intertwines the Great Depression with its causes and solutions which include controversies on which solutions were successful or failures. I’ve chosen the section in our text covering the Great Depression and the Keynesian Revolution found in Chapter 33 because it correlates with my career as a high school Social Studies teacher. Usually with constraints of time and curriculum to cover, I can teach significant events in history but there are topics that I would love to divulge a little more time and understanding to not only to teach of course, but also for my own learning. Keynesian economics is one of those topics. I discuss with my classes the basics of Keynes theories and how they were applied as well as points of success, but it is difficult to go much further than that. To summarize what I learned between our text and A Review of Keynesian Theory, Keynesian economics worked at the macroeconomic level. The theories stated that the trends at the macro-level could overpower individuals and their actions at the micro-level. It emphasized the significance of the aggregate demand for goods in driving the economy, especially economies in a slump. It was based on this that Keynes advocated the idea of government intervention through policies that could...
Words: 257 - Pages: 2
...According to text whenever a government's expenses exceed its total revenues it is consider a deficit. Government deficit spending is the main point of focus for debate in economics. The actual idea for any economy is for it to grow. It’s clear that if the economy has more available assets, more people will be afforded the opportunity to work. With that being said logically speaking the more people working, they’ll be able to purchase more things and more revenue will circulate to government agencies. The ending result is that the more cash that circulates, tax rates don’t fluctuates as much which in turn could affect interest rates in a negative or positive way. From the looks of things deficit spending can be tackled, from many angles it...
Words: 742 - Pages: 3
...economic period trailing the Great Depression. On his first term, President Reagan’s main objective was to address different economic problems through tax cut, decreased nondefense spending, increased defense spending and balanced budget. His policies brought success in stimulating the economy. He was able to improve the lives of the people and certain concerns during those times such as recession, unemployment and inflation. In 1985, while efforts have been made by President Reagan to uplift the economy, the US government was still beset by unbalanced budget due to deficits. Thus in his second term, he focused more in addressing this problem. However, the economic policies he implemented appeared to have created a setback in the country’s budget. In addition to the existing deficits prior to his term, deficits continued to increase. Objectives This paper aims to give an analysis on the cause and effect of the deficit problem Reagan faced in his second term and an analysis of the strategies he implemented in solving it. This paper also offers alternative strategies that would allow Reagan to reduce the deficits and balanced the budget. Analysis The Causes of the Budget Deficits This paper discusses three major cause of the budget deficit during Reagan’s term – tax cut, military spending and recession. The administration’s policy for tax cut was implemented to break the postwar trends to help the people and make an economic turnaround. Tax is the major source of...
Words: 2102 - Pages: 9
...Efforts to Reduce the Budget Deficit Melissa Hillard ECO203: Principles of Macroeconomics (BAJ1347A) Instructor: Kathryn Armstrong December 9, 2013 Efforts to Reduce the Budget Deficit Between the years of 1980 and 1993, budget deficits amounts increased and the national debt tripled. The public debt in this country has grown by more than $500 billion each year, in July 2012 nominal GDP was $15.8 billion. The ratio of debt reached a 10 year low in 1981 (32.8%) and went to 73% in 1993. By 2012 it was almost 100%. The actions taken by Congress since 1985 and the current debates between the Whitehouse and Congress, including what measures are necessary to address spending and revenue, will be reviewed. In 1981 President Reagan’s advisors proposed a 30% reduction in personal income taxes and an even bigger cut in corporate profit taxes. The actual result was a 25% cut in personal income taxes. At the time there was a conflict as to why the taxes were cut. There were several groups that had different opinions as to why President Reagan cut the taxes and what his expected results were. “Some supply-side economists argued that the increased incentives to work, save, and invest would actually result in increased tax revenues” (Amacher & Pate, 2012). Though there were some effects on tax revenue, there were not enough to offset the original tax cut. A second group believed that the purpose of the tax cut was to limit the revenue source that the government was...
Words: 1033 - Pages: 5
...Student’s Name Institution Instructor Date Budget Deficit Budget Deficit Budget is an estimate of the income and expenditure for some country for some set period of time say one year. Budgeting is vital in an economic perspective for the economy that desires to meet the needs of its people. Budgeting also aids an economy to hypothesise and attain the best output and revenue from the dealings in the production process. As such budgeting and forecasting serve the basic role of the economic progress of the economy based on the operations of the countries to attain the millennium development goals. Basically, the budgeting approaches used by the economy may create the deficit or at some point result in the surplus. Reduction in tax payments, increased unemployment, poor planning, increased military spending and poor projection and underestimations result in the budget deficit. During periods of economic recession in some country budget deficit is also likely to be experienced. Expansionary fiscal policy may lead to budget deficit since it involves increase in government spending. Such condition is very challenging to the economic growth and development and may also increase the rate of borrowing of a country to surpass its budget (Aaron, 2014, pp. 1). Budget deficit can be explained as the difference between the government revenue and the government expenditure calculated over some set period (one year). It occurs when the expenditure has exceeded the income for some set...
Words: 1957 - Pages: 8
...budget deficits today will reduce the growth rate of the economy of the future. The difference between what a government spends and what it collects in taxes in a given period is known as a budget deficit. There are many reasons why this might happen. One might be that if our government keeps spending money that does not exist obviously the more debt will accumulate. The government cannot keep this up without creating more debt. It the same as budgeting you personal accounts. If you get a new credit card or loan to consolidate old debt and then re-use your old cards, it rather defeats the purpose of getting out of debt. Another reason might be that due to the enormous loss of jobs there are less taxes being paid to pay our nations bills or to re-invest back into the economy. There is no point to list these reason in number order there are so many. If the deficit is growing it affects the nation savings, in turn, reduces national income. This may become possible if interest rates go up or domestic investments fall. Economists agree these a few things on when it comes to a high deficit. Deficits over a short period do not really have much affect, because the United States can borrow to cover these gaps due to the dollar’s value as the leading currency. If the deficit is sustained over a long period then is does have more an affect on the national debt. This will drive the interest rate payments up and takes away from the resources. When collective deficits reach 90%...
Words: 1940 - Pages: 8
...Reduction of Federal Budget Deficit Author Institution United States federal government has run deficit budgets in 36 out of the last 40 years. A deficit budget occurs when government spending exceeds the total taxes collected. The government of the day has to borrow either internally or externally to fund the debt. Budget deficits are not necessarily bad because they accelerate economic growth (Alesina & Ardagna, 2010). However, debt increases beyond certain levels impact the economy negatively. For instance, high government debt implies that the savings generated in the economy will be used to repay the debt instead of being invested in development activities. High interest costs created by huge debts discourage work and savings are reduced. US annual debt currently stands at 7 percent of gross domestic product compared to the general average of 3 percent of GDP. This paper suggests different policy options that should be undertaken to reduce the budget deficit by 2.5 trillion US dollars over the next 10 years. Some of the policies relate to reduce spending while others relate to increase taxes. By applying the following measures, the federal government will be able to reduce spending by 940 billion dollars, increase revenue by 1561 billion dollars and eliminate 2.501 trillion dollars from the federal budget deficit. By increasing taxes on alcoholic beverages by 40, cents on a fifth of liquor and 50 cents on a six-pack of beer or a bottle of wine, the federal government...
Words: 876 - Pages: 4
...five Fiscal Policy Paper * Depending on the time, the economy can have many financial stages. There are times when the economy is facing a budget deficit, which means the tax revenues in the government are lower than the government expenditures. The economy can also experience a surplus and high debt, which can also drain an economy. The state of our government can affect people from taxpayers, to the elderly who are collecting social security, to children needing medical and governmental benefits for their well-being. The government debt situation can be either an advantage to the population by lowering taxes, or a disadvantage by making taxes higher. * To know how taxpayers, future Social Security and Medicare users, and unemployed individuals are affected by the U S.’s deficit, surplus, and debt. It is important to understand the definitions of deficit, surplus and debt. Surplus occurs when there is more supply than demand, as in extra resources. Deficits occur when a government's expenditures exceed the revenue that it generates. Debt is an amount owed to another person or government in economics. * Taxpayers can benefit from a budget surplus. A surplus can create a reduction in the tax rate which leads to a higher consumer’s savings rate. The less taxes that consumers have to pay allows spending or savings in other areas. An increase in national savings (reduction in tax rate) also creates additional money that can be available for banks to lend...
Words: 1805 - Pages: 8
...Assignment DEFICIT FINANCING: TEORY AND PRACTICE IN BANGLADESH Submitted By Zahirul Islam [pic] DEFICIT FINANCING: TEORY AND PRACTICE IN BANGLADESH INTRODUCTION In the past as today, the deficit budget policy is famous instrument of fiscal policy used to increase the rate of economic growth of the country. That way of financing was establish after the two world wars, oil crises and current financial and economic crises. The objective in seeking deficit financing is to finance the shortfall between government expenditures and tax receipts. Tax increases are not politically palatable. Governments often resort to deficit financing when other components of GDP such as private consumption decline during recessionary periods. Such deficits, if undertaken for a short period with an action plan to create equivalent surplus in near future, could reverse decline in real GDP and stimulate growth in real GDP for the benefit of citizens of the nation. Structural deficits are indicative of inability to reduce entrenched government expenses. The sustainable level of accumulated deficits can also be determined with reference to both the deficit servicing requirements and deficit servicing sources. This analysis will entail identification of cause and effect relationships that determine the factors influencing each of these two areas. As shown by other researchers, the explanatory variables leading to deficits include domestic budgetary receipts;...
Words: 5493 - Pages: 22
... Jingze Yuan The government budget deficit is the difference between government revenue (mostly taxes) and government spending; the current account deficit is the difference between exports and imports (there are some adjustments for items such as funds sent abroad). Both deficits occur when someone is spending more than they earn; during the last 25 years the US government has tended to spend more than it collects in taxes and US residents have tended to spend more on imports than they export. A nation’s current account deficit reflects excess domestic spending. Equivalently, a current account deficit equals the excess of domestic investment over domestic savings. Regarding the Twin Deficit approach, Bernheim argues that if world capital markets are integrated and Ricardian equivalence does not hold, an increase in the budget deficit will almost certainly contribute to the current account deficit. A regression of the current account on the budget deficit (both scaled with GDP), while controlling for business cycle effects using growth and lagged growth gives a coefficient of 0.3 on the budget deficit in the case of the U.S. and similar figures for Canada, U.K. and Germany. Furthermore, tax smoothing implies a one-to-one relationship between the current account and the fiscal deficit. The underlying mechanism is that a constant tax rate induces the budget deficit to move one-to-one with public spending and therefore with the current account. The external...
Words: 478 - Pages: 2
...DQ 1. How does a government budget deficit and surplus affect the economy? During what periods in recent history has the U.S. run budget deficits and budget surpluses? What were the reasons for the deficits/surpluses during those time periods? When the government runs a budget deficit, it is essentially spending more money than it is taking in. The caveat to this is the accounting method used to measure expenditures. For example, the Social Security fund creates an expense for the future expense. A deficit is not a bad thing though. A deficit means the government is pending money and that spending can be as investment in the future (assets) or to help the economy grow out of a recession. The internet is an amazing source to locate data. I found a site with tons of spreadsheets you can download to see the history of the US budgets, spending, and debt. The government has almost always run deficits so it was quite easy to locate two of them. The first one I chose was the largest the deficit had been since the recording had started. From 1982 to 1986 when Reagan was President the deficit hit $1 and $2 billion dollars for the first time in history. This was also a time of recession in the economy. This was still only between 4% and 6% of GDP. The next period of deficits started in 2002 and have continually increased since that time. The percentage to GDP from 2002 to 2008 was between 1.5% and 3.2% though. In 2010, the percentage of the deficit to GDP spiked at 10.7%, the highest...
Words: 663 - Pages: 3
