Measures of Budgets Balance - Essay Example

Running head: Macroeconomics Macroeconomics Insert Insert Grade Insert 16 March Budget Deficit Introduction Most government budgets are often subjected to implication complexities considering their enormous sizes. Governments need to put in place indicators that would convey information regarding the impact of their fiscal policies on financial resources and domestic demand. Indicators to fiscal stance should be able to reflect economic activities and their implications on the economy, in a manner that is comprehensive. The government needs to put considerable efforts to come up with conceptually appropriate and accurate indicators with respect to impacts of their fiscal policies. Moreover, ideal and functional fiscal stance indicators should embrace in-depth analysis of fiscal policies and collective economic variables. Actual Budget Deficit The actual budget deficit has from time to time been used as an indicator of the fiscal stance, although various shortcomings have rendered it a rather inadequate indicator. The overall balance of a government budget is basically a measure of the difference between government expenditure and revenue. In a case where expenditure outweighs revenue, the overall balance presents an actual budget deficit, which is an indication of an expansionary fiscal stance. The actual budget deficit indicates a fiscal stance where the negative impact of revenue on an economy’s aggregate demand is far much implicative of the positive effects achieved through government spending. Gross national product of any given economy at any given time is on the receiving end as it is negatively impacted by the fiscal policies put in place by the government (International Monetary Fund, 1989, p.76). However, the measure of actual budget deficit needs to be analyzed and judged more cautiously for accurate and relevant indication of the fiscal stance. In case keen judgment and analysis of the actual budget deficit measure is compromised, it ceases to act as a good indicator for the fiscal stance with respect to other economic variables. The actual budget deficit is also regarded as deficient indicator of fiscal stance, since it only offers impacts on aggregate demand perspectives and overlooks other economic variables such as economic sustainability, monetary stance, and growth aspects. Moreover, the actual budget deficit overlooks other economic complexities such as the manner in which the deficit is financed with regards to successive impact of the country’s economic variables. Fiscal impact complexities encompass the manner in which an actual budget deficit is financed among other special measures that are put in place to complement the overall budget balance. The actual budget deficit as an indicator to fiscal stance is inefficient in case of the supply aspects of the economy where greater significance is placed on the fiscal policy structure. Fiscal structural adjustments are generally an important part of the sustainability and stabilization of the economy in general. This is in consideration of aspects such as undesirable taxation system that leads to savings, and work disincentives among other aspects such as resource misallocation. Fiscal policy structures may also render government spending less productive with regards to spending criteria among other shortcomings. The actual budget deficit is therefore rendered deficient on the basis that it overlooks all other factors and impacts that pertain to fiscal policy structure. The government often borrows huge amounts of money from overseas and domestic investors at high interest rate to finance the budget deficit. This will lead to accumulation of the national debt in the long run, which will in turn subject future governments to massive debt obligations. More so, the opportunity cost of debts obligations would negatively impact on general growth and sustainability of economic developments. The need for higher rates of taxations and interests on lending would also lead to crowding out, where negative impacts are evident on investment spending and consumption. Budget deficits generally consume capital intended for use by future generations, which implies a transfer of public debt burden from one generation to another (Jacobs & International Monetary Fund, Fiscal Affairs Dept, 2002, p.4). The graph below indicates the deficit that exists in both structural and actual government’s deficit which is consequently reflected in economic progresses and more specifically the gross domestic product of a country. Source: macroscan.org The fiscal stance basically encompasses aspects of fiscal policy used to expand output and demand actively in a particular economy in which the policies have been put in place. Indicators that fail to recognize fiscal stance aspects in a comprehensive manner such as the actual budget deficit is rendered deficient. Fiscal stances include neutral, reflationary, and deflationary fiscal stances. A neutral fiscal stance is evident where tax revenues equal government spending in a budget that is balanced with no impact on economic activity levels. A reflationary fiscal stance on the other hand is evident where revenues are significantly less than government spending needs, and the government borrows money to increase economic activity and aggregate demand by injecting borrowed amounts into the economy. Deflationary fiscal stance consequently occurs when the government’s spending is less that its revenue and the government seeks to inject fewer funds into the economy than it is taxing to reduce the level of economic activity and aggregate demand. The Keynesian school of thought argues that fiscal policy can massively impact on employment, economic output, as well as aggregate demand when an economy is operating below its full output capacity, and more so, where demand stimulus is a necessity. According to the Keynesian, the government has a mandate to actively and effectively use the fiscal policy to manage the level of economic activity, aggregate demand, and output (Chamberlin & Yueh, 2006, p.95). Keynesian economist arguments place emphasis on the variation of the levels at which governments borrow funds to cover budgetary deficit as a legitimate means to aggregate demand management. This asserts to the actual budget deficit as a deficient indicator for fiscal stance that may be used to give an insight to how aggregate demand should be managed. Increased government borrowing basically serves as a useful tool to stimulate aggregate demand in situations where other economic sectors are suffering from decreased spending. On the other hand, huge negative output gaps can be avoided by the government’s use of fiscal policy to enhance real national output to measure up with maximum potential of gross domestic product. Alternative Fiscal Stance Indicators Alternative fiscal stance indicators include the current fiscal balances, cyclically adjusted balances, operational balances, domestic fiscal balance, and primary balance. The current fiscal balance is the difference between current expenditure and revenue, which provides a measure of the contribution of the government to national savings. When current revenue is more than expenditure, it implies government’s potential to finance consumption, although this measure does not contribute to economic growth. On the other hand, the primary balance provides indications to current fiscal efforts where previous deficits predetermine interest payments. Primary surplus in this case is necessary for reduction of debt to gross national product ratio in countries that have large public debts in relation to gross national product (Kopits, Craig & International Monetary Fund, 1998, p.27). The Cyclically adjusted balances provide indications to the fiscal position measure with regards to its net macroeconomic development impact on the budget. This indicator takes into account the fact that revenues have the likelihood of being low over the business cycle course concerning expenses such as unemployment insurance benefits. A higher fiscal deficit in this case reflects that an economy is slipping into a trough although it cannot be attributed to fiscal stance loosening of the fiscal stance, but may simply reflect that the economy is moving into a trough. Calculation of the cyclically adjusted balance essentially entails estimation of what cyclically adjusted expenditure and revenue would be when an economy was at its potential (ElGanainy & Weber, 2006, p.13). The domestic fiscal balance seeks to measure conventional deficits arising as a result of omission of transactions that affect balance of payment in the domestic economy. The indicator is used to identify the impact of government policies on the domestic economy with regards to direct expansionary aspects. The operational balance on the other hand takes into account the fact that government debt high interest rates paid up during extremely high inflation times compensates government debt purchasers effectively for the reduced debt principal with respect to inflation’s real value. Both the ratios of deficits and interest outlays in relation to gross national product are very high in such inflationary circumstances where the deficit to gross national product overstates significantly the extent with which a deficit prevails in low inflation (Jacobs, 2002). Reference List Chamberlin, G. & Yueh, L., 2006. Macroeconomics. Thomson Learning. International Monetary Fund. 1989. World Economic Outlook, April 1989 (English). Washington DC: International Monetary Fund. Jacobs, D.F., & International Monetary Fund. 2002. Fiscal Affairs Dept. Suggestions for Alternative Measures of Budget Balance for South Africa. Washington DC: International Monetary Fund. ElGanainy, A.A. & Weber, A., 2006. Estimates of the Output Gap in Armenia with Applications to Monetary and Fiscal Policy. Washington DC: International Monetary Fund. Jacobs, D.F., 2002. Suggestions for Alternative Measures of Budgets Balance for South Africa. Washington DC: International Monetary Fund. Kopits, G., & Craig, J.D., International Monetary Fund. 1998. Transparency in government operations. Washington DC: International Monetary Fund. Read More