is it possible for a budget deficit to be beneficial??
- I didn't do it!Lv 61 decade agoFavorite Answer
Yes, it is possible, government deficits can be beneficial: There is a component in the government deficit which occurs automatically in an economic downturn: lower economic activity decreases the tax revenue and at the same time increases the transfer payments (e.g. unemployment benefits) which lead to an overall higher government deficit. This so called non-discretionary component in government spending prevents a deflationary spiral and thus performs an important stabilizing function, because it allows the private households to save more. Given that during a recession there is a sharp increase in uncertainty and insecurity, the private sector will have the tendency to spend less than its income which translates into a rising personal saving rate.
In the current recession, for example, the net financial balance of the private households has risen from -3.6% of GDP in 2006 to +5.6% in the first quarter of 2009. Such large increase in savings translates in a decline in consumption and means falling sales, production and further declines in GDP. To meet the private sector increased savings the government should run bigger deficits to prevent a deflationary spiral.
- Anonymous1 decade ago
running budget deficit is beneficial to certain extent but not permanently as it make the country broke; bear in mind that the govt. needs to pay back to the bondholders the principal and interest amount; when a country has huge national debt then investor will lose confidence of lending further especially in recession time (where govt. need to money to stimulate the economy); and thats y the US govt. is concern of huge budget deficit that it has to increase tax substantially (if it continues to spend more and more) in the future leaving to the next generation to pay more taxes than their older folks; alternatively, the govt. may reduce spending to pay back some of the debt
note that the govt. is the borrower and it has to meet the debt obligation; huge national debt may cause collapse of the economy in the long-term as the govt. trouble meeting investors obligationSource(s): economics reader
- Anonymous1 decade ago
yes, you spend over, but what you spend on helps to grow the economy. like purchase of capital goods (investments)