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High Budget Deficit and the Growth Rate of the Economy - Essay Example

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This paper talks about the steadily rising budget deficit in the United States, as percentage to GDP. The essay then discovers possible negative ramifications, that the current situation of budget disbalance would have on the future rates of growth of American economy…
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High Budget Deficit and the Growth Rate of the Economy
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Download file to see previous pages The nation with high private saving will offset the moderate deficit financing in a much better way to provide for investment capital necessary for the growth of economy. Thus, for future economic growth national savings matter highly. National saving is the measure of the accumulation of financial and other real assets overtime. Future national income will largely depend upon this accumulated stock of assets. Unfortunately, deficit financing coupled with nil or negative private saving has made the national saving negative. In this perspective, deficit financing on a sustained basis cannot help US economy. Higher Interest Rates Macguineas (2011) argues that ever increasing deficit financing will exert upward pressure on interest rates thereby increasing the cost of capital. Budgetary deficits are financed through government borrowings. When government borrowings rise to a high level, the government may have to offer increased interest rates so that sufficient buyers are attracted to buy government debt. Obviously, higher interest rates will tend to retard the economic growth rate. Higher Borrowing Leads to Higher Interest Payments Increasing borrowings year after year will necessitate higher spending on debt-interest. Higher interest burden eats away the productive deployment of the capital necessary for the economic growth. As a result, the needy sectors such as education, health starve of the funds that are necessary to provide impetus to the economy. Defense Spending and Budgetary Deficit Korb et al. (2011) of the center for American Progress (CAP) argue that defense spending has created the current fiscal crisis. The experts from the CAP believe that the massive deficit is the result of increasing defense budget during 2004 through 2012. It...
This essay offers a comprehensive review of the effects, that the high levels of budget deficit exercise on the economic development of the country, using the example of the US. In 2011, it was the third straight year when the gap between American government's income and spending remained negative to the tune of $1 trillion or above. In percentage terms, the deficit is hovering at around 10 percent of gross domestic product in last two years. This was causing serious concerns at several quarters on soaring national debt.
The national saving rate is important for future economic growth and budgetary deficit has a direct bearing on national saving rate. Since last many years private saving is meager in the US and in last couple of years it has gone even negative. With such a low/negative saving, it is difficult to obtain economic growth and US productivity at desired rate.
Ever increasing deficit financing will exert upward pressure on interest rates thereby increasing the cost of capital. Budgetary deficits are financed through government borrowings. When government borrowings rise to a high level, the government may have to offer increased interest rates so that sufficient buyers are attracted to buy government debt. Higher interest rates retards the economic growth rate.
It can be concluded that when the government incurs debt, it is important to know what government does with that money. If the money are deployed for productive purposes, it can certainly help the economy of the present as well as future generations.
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