Federal Budget Deficits: Cost and Benefits

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The short term and long term benefits of having deficits

There are myriad of reasons why federal deficits would be desired. As a matter of fact, the benefits are often put into consideration when exploring the possibility of balancing the United States government budget. Generally, there are benefits which are obtained from deficits attached to government spending in expenditure areas like salaries, defense, financial aid and cash flows. According to Huntley (71), prevalence of deficits does not always attract negative outcome since there are some benefits derived from them. These benefits are divided into two categories namely the short and long term benefits. The short term deficit has its own merits.

For instance, such deficits assist in solving immediate monetary problems that a government may be facing. On the other hand, long term benefits that are associated with deficits in government budgeting are usually spread over a long period of time. Huntley (56) notes that the most important consideration when discussing the benefits accrued from this type of deficits is that the economy is not slowed down by any margin contrary to the perception of some economic critics.

Short term benefits

The federal, state and local deficits can be of great help to modern generation. For example, borrowing in order to finance the federal and national governments can quickly generate employment opportunities to those who are jobless. When the unemployed youths secure jobs, it implies that they can economically sustain themselves instead of indulging in other anti-social activities such abusing prohibited drugs. Huntley (35) argues that deficits can cause interest rates to rise significantly. When interest rates go up, it is possible for major institutions to invest huge sums of financial resources for purposes of reaping greatly in the long term. Therefore, federal and national borrowing can help solve some immediate problems in the country. For example, it is possible to allocate finances in areas that require huge funding. If a government corporation is collapsing, it is possible secure more funds to it so that its activities can be revived as part and parcel of boosting productivity.

Long term benefits

In most cases, deficits are meant for long term measures. According to Huntley (2011), some of the major investments that are undertaken with deficits include social security and infrastructural development. In essence, budget deficits are usually associated with trading taxes and which means that the country and the region would have long term benefits. The public is capable of spending wisely and saving to the maximum. When considering financing the defense, it is a long term measure of ensuring border security. With increased terrorist threats and attacks in the world, it only makes sense for a country United States to invest a lot in border security. Enhanced border security means that the country would continue in its productivity with little or no fear. As well, the short term measure of putting the young ones in the country with enhanced sustainability is a long term benefit. When the current generation is well financed, it means that the future of the country is in good hands.

The short term and long term costs of having benefits

In most cases, deficits are known for negative outcomes rather than merits. There are quite a number of accrued costs that are usually attached to national and federal budget deficits. Even though there are some benefits attached to a well financed defense and social security in addition to infrastructure, the overall cost is huge. According to Kennedy (30), a massive rescue of a national or federal economic growth has its negative.

Majorly, budget deficits means putting the current government and future governments to always be in huge debts. Kennedy (329) is of the view that the government would result to using some crude measures so as to cushion itself from being in huge debts. For example, it may result to adjusting taxes upwards which means that the population would be compelled to give more than usual. The overall cost of having budget deficits is putting the general population in more burdens.

Short term costs of deficits

There are short term disadvantages of having budget deficits. These are the costs that are felt by the government and the general population almost immediately after the deficit has been incurred. Traders, creditors and investors get into high alert that the government may fail to pay this amount. For example, if the government results to raising Central Bank lending rates, the banks in the country may increase their lending rates. The creditors therefore will have to pay more to refinance their loan in banks. The increase of interest rates by the government may mean that the exchange rate would depreciate. There would also a decline in the confidence which can significantly reduce the prices of stocks and household wealth. As well, this form of financing the budgets may results to increased costs of doing and financing business. Significantly, it also means reducing domestic spending of the private investors in the country. Majorly, the short term costs are on fear of general population whether foreign or local in investing more in the country.

Long term costs of deficits

Perhaps the short term costs may not mean a lot to the government and the country which has heavily borrowed to finance the budget. The long term costs become the real costs. This is because borrowing can mean putting the governments in future problems. In most cases, the borrowing of the government to finance the budget is a mutual agreement to repay after a long period. This means that the government borrowing may not be the one to pay. According to Kennedy (23), the real cost is in a long term uncertainty on sustainability of the government. The investors and business owners may have a long term fear that the business would not be good in the country. If investors opt to go, it means that the government would have to look for other means of sustaining itself. The projections given in the budget become uncertain simply because there is no certainty that the government would be able to reduce the deficits.

The costs and benefits of occasional deficits (as opposed to regular, annual deficits)

Some deficits are occasional as opposed to well planned budget deficits. Occasional borrowing is done to finance solve problems immediately. For example, if there is a crisis in a state corporation, the government may borrow to put the company on a winning track again. Such occasional deficits are bad because they are haphazardly done. Haphazardly done borrowing can add more uncertainty than deficits that are done with full knowledge of the public and other interested parties in the country. However, there are some benefits that are accrued to having such kind of benefits as opposed to regular or well planned deficits. Just as it is the case of putting uncertainty when there is a prompt borrowing for a budget, there could be certainty because the people in the country would manage their immediate problems. For example, the government may decide to have deficits for the purposes of increasing employment of youths in the country.

Benefits of occasional deficits

Heniff (211) is categorical that the occasional deficits are not always problematic. Such kind of borrowing can help the federal and national governments to put in place viable taxation system and outlays that can shield taxpayers to finance their programs. When the taxpayers are given the value of their money, they get confidence. The deficit cost is always on the governments and not on the people. As far as people have their problems solved immediately, they continue with their routine form of development. It is possible that increased productivity resulting from occasional deficits can multiply development. on the other hand, regular or planned deficits mean that the government have to wait until some specified time to get the money. When this is the case, people have to wait until the government responds to continue with their normal forms of productivity.

Costs of occasional deficits

Government borrowing is never a solution to issues affecting the country. This is the same case with federal deficits because it means being in perpetual problems. It is more problematic if the government indulges itself in deficits having not planned adequately for it. All borrowing comes with some form of interest. This means that the more the government indulges into deficits, the more the interest. At least, when the government has a regular borrowing, the people in the country are assured that there are planned forms of paying. The long term benefits of deficits may be more when there is a plan for the deficits rather than when they are done occasionally.

The costs and benefits of paying for the deficits: how is this to be accomplished?

According to Hyman (493), payment for deficits is both a benefit and a disadvantage or cost. If the government is to result to paying this debt, it is possible that it will offset the burden sooner than expected. This is because deficits are always problems for the future and the sooner they are paid, the sooner the government gets off the hook. However, payment of deficits can mean slowed economic growth (Hyman 493). The following are costs and benefits of paying deficits by the governments.

Benefit of paying deficits

It is a way of reducing the burden. If the government is to start paying the amount today, it means that the people would not be compelled to pay for the amount tomorrow or in the future. Generally, it is better to pay when the amount is small rather than paying when the amount has accumulated. It is not certain that the government would be in good positions to pay for accumulated debt. However, it is possible to continue borrowing if there is a system of paying the amount promptly. Payment of deficits regularly means that the government is only paying the amount it can afford. The real benefit in this is that people would not be compelled to pay for this amount when it is late. Generally, a government which is compelled to pay for huge amounts in the future would result to increasing taxes and other measures. Therefore, prompt payment of deficits is an advantage to the general population.

Disadvantaged of paying deficits

According to Hyman (342), national debt means positioning the country well in the international arena. If a government such as the United States is in debts, it means that it is in mutual trades with the lenders. These lenders will be compelled to be in touch with the government and mostly will increase their investment in the country. On the other hand, payment of deficits means that the government wants to put itself independent. It may actually be good to be in debt to continue financing major projects than leaving within the means. Borrowing more without paying means more investment and so productivity of a country rather than scaling due to payments of the money borrowed.

How deficits are paid

There are several ways that governments use to pay off the accrued deficits as a result of borrowing. In some instances, the government results to selling some of the assets it has. For example, the British government resulted to sale of assets in the year 2010 which was thought to probably include the Royal Mail. For the United States of America, selling of some assets is thought to be a good way of removing the country from perpetual debt. One of the assets that is thought to be on its way to be sold is the New York Federal Reserve Building.

Costs and benefits as defined by employment and real economic growth

In most cases, the cost and benefit of deficits is measured in economic growth of a country. According to the International Monetary Fund (98), the real implications of government borrowing are either improved economy or slowed economic performance. The following are cost and benefits emanating from deficits as measured in real economic growth.

Costs of deficits

It is always a host of challenges when a government attempts to go trough the cost of deficits. This can be synonymous to when an individual person is in debt, it means that he or she may not continue to function well without first of all paying. For a government, it may not result into massive investments without first of all understanding how the accrued debts will be paid back. In any case, debts may not necessarily translate to real benefits in an economy. In essence, there may be possibility of wasteful public spending. When there is adequate liquid cash to spend, the end result may be slow rate of investments from individuals.

Financing of debt is always a challenge endure by governments. For example, the British government has resorted to selling of its important assets in order to pay for the amount borrowed. Therefore, it is better to be free from large debts because it would mean taking out some of the assets. On the same note, the general population may be uncertain on how the amount would be paid. Such doubts may end up slowing down an economy.

Benefits of deficits

The presence of deficits implies that there is likelihood of economic growth. If the monetary resources are invested wisely, it would be possible to compound both the macro and micro investments in key performing sectors of an economy. Indeed, deficits act as tools of managing flow in demand. As a result, a governing authority is indirectly compelled by the forces of demand and supply to put financial resources into appropriate use. Since the borrowed resources will eventually be paid back, the government is automatically obliged to execute profitable investments with impressive returns.

Works Cited

Heniff, Bill. The federal budget process: A description of the federal and congressional budget process, including timelines. Alexandria: The Capitor.Net, Inc, 2009. Print.

Huntley, Jonathan. Federal debt and the risk of a fiscal crisis. New Jersey: John Wiley & Sons, Inc, 2011. Print.

Hyman, David. Public finance: A contemporary application of theory to policy. Belmont: CengageBrain Learning, 2010. Print.

International Monetary Fund. Fiscal Stimulus to the rescue? Short Run benefits and potential long run costs of fiscal deficits. Washington D. C: IMF Working Paper, 2009. Print.

Kennedy, Peter. Macroeconomic essentials: Understanding economics in the news. Massachusetts: The MIT Press, 2011. Print.

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