The level of government borrowing is an important part of fiscal policy and management of aggregate demand in any economy. When the government is running a budget deficit, it means that in a given year, total government expenditure exceeds total tax revenue. Governments usually borrow to finance spending without increasing taxes.

Government borrowing is a bad thing as it increases national debt and there is a big opportunity cost on the interest paid on the borrowing, which in the UK is around £51 billion. This money could have been spent elsewhere which may have benefitted the economy in a more productive way; however it is argued that it is unlikely that the government can improve the economy without going into a deficit. It may also be a big problem in the long run as the government may increase taxes to finance the borrowing. If taxes go up in the UK, this means people have less disposable income meaning aggregate demand decreases, which in the long run decreases growth and tax revenues which is seen as self-defeat, though it is unlikely that the government will do this as it is also politically unpopular.

The Government deficit can be seen as not such a bad thing if it’s being used to stimulate AD, the opposite of increasing taxes. This means that there is more growth to the economy as tax revenues increase due to there being more jobs as this increases the amount of money the government get from income tax and VAT. This shows that the borrowing could be seen as a valid investment which in the long run may generate more income. Also different circumstances sometimes dictate that the government needs to borrow money. For example cyclical factors may necessitate borrowing e.g. when there’s not enough demand and the borrowing is used to kick start the economy to get it out of a recession. However this is only done if the money is used productively.

A