Issues in Public Finance

Pros and Cons of National Debt

National debt refers to how much a country owes to lenders. Whenoperating on stringent budgets or through a development strategy inwhich a country cannot foot all the expenses at once, the governmentborrows money from businessmen and other governments. Most if thecountries enter in long-term national debts, and they are mostly forfunding development projects. Most governments, especially indeveloping countries, borrow from developed countries. This type ofdebt has various advantages and disadvantages.

Pros

First, a country can implement projects through the borrowed moneythat it could not have otherwise managed to fund. For example,long-term projects require huge amounts of capital and the stringentbudgets that some countries operate on only results to meagerallocation to development projects. National debt enables them tocontinue implementing high-value projects despite their budgetdeficits (Kumar 5). Secondly, the national debts accrued by a countryturns out to be beneficial during recession periods. Therefore, acountry enjoys a flexible fiscal policy. If a country has notnational debts, I can be difficult for money lenders to assess itscreditworthiness and it can be difficult to secure a future loan. Itbecomes easy for a country to stimulate its economic growth evenduring the recession period (Kumar 8). Also, national debt cushions acountry from extensive unemployment. When a court is running on adeficit budget, it may reduce its allocations of some projects andsome people may be rendered unemployed, However, when the governmentborrows, it retains its workforce. Also, it results to both directand indirect employment to the future generations (Kumar 15). Whenthe financed projects become productive, they provide employment or aconducive environment for self-employment.

Cons

Despite the advantages, national debts come with some disadvantages.While borrowing some funders ay put pre-conditions before releasingthe funds. For example, a country that spends a big percentage of isbudget on recurrent expenditure may be required to reduce theexpenditure. The move grabs the autonomy to spend funds from thegovernment. Also, increased national debt can cause instability in acountry (Laubach 859). When a country accumulates high amounts ofdebts without having a fairly equal increase in the GDP, it meansthat most of the country’s resources will go into servicing thedebt. Laubach agrees that the instability results due to thefrequent financial crisis, slower economic growth and the possibilityof high inflation rates (862). Another major disadvantage of thenational debt is the political ties that some countries may attach tothe financial assistance. A country that changes its politicalstructure and environment and creates a conflict with the possiblemember countries of the region in which it borrows may fail to securea loan. Therefore, nation debt is not purely on financial assistancefor development projects, but it also has a significant level ofpolitical aspect.

Pros and Cons of Deficit Spending

A budget deficit also referred to as deficit spending is a result ofthe government fewer funds that what the expenditure projections. Inthe case budget pending, the government has to borrow funds fromother sources. It has various advantages

Pros

First, deficit spending accelerates economic growth. It is one of theinstruments of triggering the government to extend its developmentmuscle beyond what it can currently afford. Even without enough fundsat a given time, a budget deficit accommodates all the projects in abudget plan (Beetsma, Giuliodori, and Klaassen 416). Also, budgetspending encourages private investors to put their money intogovernment projects and earn profits later. Without the deficitbudget, it can be difficult for a country to estimate the cost ofdevelopment projects as well as setting the limit to which thedeficit should extend. However after drawing budget with a deficit,it is easy to approach potential funders and solicit loans from them(Beetsma, Giuliodori and Klaassen 419). The economic growth,therefore, grows at a higher rate than when a government sticks toits meager resources without being aggressive and planning beyondwhat it can raise regarding revenue. The budget deficit is also aform of control on the government spending. Beetsma, Giuliodori andKlaassen agree that when the government draws a budget that has adeficit, it rises as much as possible to allocate funds to the mostnecessary projects to avoid wastage of funds and reduce the gapbetween what it can afford and what it will borrow from othersources (421)

Cons

When there is a deficit spending, it means that the government cannotsave any of its resources on a plan to fund a future project. It is,therefore, a threat to a country when a case of emergency rises andthe government has no funds to cushion its citizens from the effectsof the occurrence or engage in efficient mitigation efforts. AsBeetsma, Giuliodori, and Klaassen puts it, most of the governmentoperating deficit budget set aside very little funds for emergenciesand they tend to rely on relief and humanitarian agencies duringtimes of crisis (421). Also, a continued deficit spending creates avicious cycle of borrowing. To avoid borrowing too much to sufficethe deficit spending the government usually increases taxes of goodsin the home country. It results in a fall in the standard of living,rise in the price of goods and services and rise in inflation.

Besides the negative effects on the citizens purchasing powerdeficit spending increases foreign expenditure. Although the fundsborrowed to meet the budgetary requirements contribute to increasedinfrastructure, the borrowing is usually at high-interest rates.While money does not flow into the country, the country continuouslymakes payments to the lender. The actual investment of a country,therefore, increase at a very low rate in actual terms since asignificant number of projects represents what the country hasborrowed. An increase in the internal revenue and efficient use ofthe internal resources can contribute to a gradual correction of thedeficit spending.

Pros and Cons of Budget Surplus

Budget surplus is the amount of money that remains after thegovernment allocates funds to all its intended functions. A surplusis considered as a sign that a government is running efficiently. Thebudget surplus can repay future debts or expand a country’sinfrastructure.

Pros

Countries with surplus budgets are very flexible in simulativespending during recessions. When the economy of a country faltersgovernment to use stimulus mechanism to jump-start the country andengage people in more productive activities. The surplus budget comesin handy to stimulate growth, and it often helps in shortening therecession period and cushioning people from adverse effects of therecession (Favero and Giavazzi 29). On the some note, when there is asurplus budget, countries can make choices on the most viableprojects to put the country back on track without bowing down to thedemands of funders.

Also, budget surplus indicates a high sense of discipline in itsfinancial environment. Therefore, when such a government wants toenter into an agreement with another country it can secure a loan atvery low interest rates. Lenders look at the overall health of acountry’s financial environment and management of funds. Besidessecuring loans at low-interest rates due to credibility and expressedfinancial discipline budget surplus woos potential investors who eyethe stability of the country to make profits. Most of the locallenders are likely to offer low-interest loans, and the move attractsinvestors (Favero and Giavazzi 29). The government does not competewith the citizens in borrowing from local institutions, and the lackof competition lowers the rate of lending.

A Budget surplus also results in low unemployment Most of projectsfunded by the government provides employment to the citizens eitherdirectly or through the by providing the right environment forself-employment. Most of the countries with surplus budgets directthe biggest portion of their budget to development projects andinfrastructure. The long-term result is very low rates ofunemployment.

Pros

First, countries obsessed with having surplus budgets are likely totax their citizens more than those having balanced budgets. Althoughmost of the countries that have surplus budgets have high standardsof living the citizens spend a significant amount of money on tax(Favero and Giavazzi 21). While the country can be running to asurplus budget, the overall satisfaction of the citizens may be verylow. Also, running on a surplus budget may be the sole aim of agovernment to prove its financial independence and discipline whileoverlooking instrumental projects that can accelerate the country’seconomic growth. As observed, most of the projects that thegovernment implements as long-term require high capital investments.Therefore, the government can fail to include such plans in thebudget so that the final figure can have a surplus value.

The surplus on the budget also affects the export and import. Asurplus budget indicates that a country exports more than what itimports. For countries that do not produce a lot of products both inthe agriculture and the manufacturing sector, the citizens might notenjoy products from foreign markets the presence of the governmentcontrol. Favero and Giavazzi agree that controlled importationreduces the demand for products in a country, and it may affectbilateral trade (32). Also, the internal private investors suffer arecession on their balance sheets. A surplus in the budget meansthat most of the investors in the country concentrate on savingrather than spending on investments. The economic growth of acountry, therefore, recedes and grows at a very low rate.

In conclusion, national debt, budget deficit, and surplus areimperative considerations that each country makes when contemplatingon financial decisions. National debt accelerates growth whenborrowed on the most appropriate parentage of the country`s GDP.Also, a deficit allows the country to borrow and finance projectsthat could have otherwise been stalled. A surplus can cushion thecountry in case of an emergency. However, it can have devastatingeffects on investment and the overall economic growth of a country.

Works Cited

Beetsma, Roel,Massimo Giuliodori, and Franc Klaassen. &quotThe Effects of PublicSpending Shocks on Trade Balances and Budget Deficits in the EuropeanUnion.&quot Journal of the European Economic Association6.2‐3 (2008): 414-423.Print.

Favero, Carlo, andFrancesco Giavazzi. Debt and the Effects of Fiscal Policy. No.w12822. National Bureau of Economic Research, 2007. Print.

Kumar, Manmohan, andJaejoon Woo. &quotPublic Debt and Growth.&quot IMF workingpapers (2010): 1-47. Print.

Laubach, Thomas.&quotNew Evidence on the Interest Rate Effects of Budget Deficitsand Debt.&quot Journal of the European Economic Association7.4 (2009): 858-885. Print.