Disadvantages Of Deficit Spending

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Abstract In 2014, the US government spending was $3.5 trillion and total revenues were at $3.014 trillion leaving a budget deficit of about $486 billion. This paper will define deficit, deficit spending and the good and the bad of government deficit spending. I will also explain some benefits and detriments to government deficit spending and how each can affect the economic well being of the country. The benefits of spending during recessions and the creation of the “crowding out effect” will also be discussed. Keywords: Deficit Spending, “Crowding Out” Effect The Advantages and Disadvantages of Deficit Spending: How it Affects the Economy In 2014, the US government spending was $3.5 trillion and total revenues …show more content…

The government will obviously have no savings during a deficit period, as they are borrowing to fund their excessive spending programs. This becomes a serious issue during emergencies, as there will be no surplus on which to rely on during these periods, which will in turn lead to excessive borrowing from other nations to support this spending level, usually at very high interest rates. This in effect is spending money which you do not have and can end up increasing the cost of everything you buy. As prices start to rise, this can be detrimental to the economy, leading to inflation. If interest rates or inflation start to rise, due to the efforts of the government, this can lead to what many economists term the “Crowding Out …show more content…

During a recession, the government usually will utilize expansionary fiscal policy which will end up reducing investment spending by the private sector. The increase in government borrowing and spending to help lift the economy has created the “crowding out effect” on private investing. In another instance. increased government borrowing will lead to more debt, thus creating an increased call for loanable funds and an increase in interest rates, which creates difficulty in the private sector for getting funds with which to invest. A decrease in investments by businesses can hinder the long-term growth of the economy on the supply side. Thus, with the government “crowding out” companies that would like to invest but, because of high interest rates, cannot borrow funds with which to do

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