Good Example Of Essay On Government Deficit

There is lack of consensus among professional economists, policy makers and academicians on the main reason for the rise in government budget deficit. Government deficit occur when government expenditures exceeds the total revenues of the government. From the definition, government budget deficit are likely to be caused by increase in government expenditure or a decline in government revenue.
One of the main reason advanced for the sharp rise in government deficit is that governments felt the need to intervene in the economy and rescue the financial system in their respective economics. After the crisis government felt the need to pursue Keynesian economic policy in order to boost aggregate demand to revive the economy. Keynesian economic policy entail fiscal policy aimed at smoothing economic business cycle to mitigate the negative effects of depression and boomsAfter the financial crisis, there was massive layoffs which worsened the situation further as firms faced declining aggregate demand forcing them to make further lay-offs increasing unemployment and consequently compounding the problem further. The economies were facing depression and hence the need to support economic activity. In addition, increased unemployment meant that these economies had to spend more money on social welfare such as unemployment benefits. It is noteworthy that most of these economies have robust social welfare schemes. The public debt as a percentage of GDP increased from 29% in 2007 to 59% in 2010 in the UK whereas in Spain it increased from 19% to 42%
The crisis resulted in business making financial losses which translated into negative taxes. Consequently, this reduced the corporate tax revenue of the governments. The situation was further aggravated by massive lay-offs as businesses tried to mitigate their losses. This meant that the tax revenue from personal income reduced significantly. Besides, high unemployment reduced aggregate demand this meant that tax revenue from spending such as Value Added Tax and excise duty also declined drastically.
In some countries such as Spain, Greece and Italy huge government deficits have been attributed to adoption of the Euro. Before the monetary union was enforced, huge government deficits would results in high interest rate and a decline in the exchange rates. This provided a self-regulatory mechanism that forced governments to reduce their borrowing and pay-off some of the outstanding debt. However, after the Euro was adopted this regulatory mechanism was eliminated. Consequently, the result was huge government deficits to unsustainable levels. In the case of Greece, the fear that the country would not be able to meet its maturing obligations resulted in an increase in the interest rates of Greece bonds which compounded the problem further as the interest payment of its debt increased.
Lastly, according to modern monetary economists the huge government deficit in these countries can be attributed to the adoption of the Euro. In forming a monetary union, government have to give up their sovereignty of making their own money. Therefore, they face budget constraints like household. Such a government cannot monetize budget deficits as it does not issue its own currency. Consequently, its only option to roll-over debts if it cannot settle them increasing the government deficit in the long-run. Similarly, such a government can only employ fiscal policy and not monetary policy in intervening in its own economy. Monetary policies can only be made by the central authority, in this case the European Central Bank, based on mutual consensus of all the member countries.

Bibliography

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Sterdyniak, H. (2012). Causes of the European Debt Crisis. Franco-German Conference: Overcoming the Debt Crisis and Securing Growth, Irreconciable Changes in The Euro Zone. Paris: Observatoire Français des Conjonctures Economiques.
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