Which of the following is not a consequence of an increase in the governments budget deficit?

Abstract

In the present study the economic, political and institutional sources of budgets deficits are analysed for two regions South Asia and ASEAN countries for the period 1984 to 2010. The results reveal that high income, rising inflation and large budget to GDP ratio are associated with budget instability, where as a strong inertia in budget deficit volatility exists. The exposure of more external shocks make the budget deficit more volatile, however, countries with high population growth have less volatile budget deficits. The results indicate that high level of political stability and democracy and improvement in social and economic condition reduces the budget deficit volatility. High corruption and low institutional quality lead to more fluctuations in the budget deficit. The results suggest that political and institutional factors have a direct impact on fiscal instability beyond the economic reasons to effect fluctuations. The results of the current study leads to important implication that by improving the quality of institutions, creating situations for economic stability and moving towards democratic regimes would ensure more stable fiscal deficits and resultantly positive effect on the long term economic growth.

Journal Information

The Pakistan Development Review started at the Pakistan Institute of Development Economics as Economic Digest in 1958, The Pakistan Development Review (PDR) has been published by the Institute regularly since 1961, with only a short pause during 1971-72. For several decades now, it has been a refereed international journal of Economics and related social sciences. Redesigned and re-planned twice in the last two decade, the contents have tended to emphasise theoretical-cum-empirical contributions; the underlying commitment has been to strengthen the interest in the general areas of Economics and other social science fields. The journal is issued quarterly and, with a fair mix of topics, regularly contains original (theoretical and empirical) contributions to Economics, in general, and on Pakistan’s socio-economic problems, in particular. Nearly every issue carries contributions by scholars from Pakistan and overseas. Currently, the following editors work regularly on the PDR: Dr Rashid Amjad Chaudhry (Editor) and Professor Aurangzeb A. Hashmi (Literary Editor). The Review’s Editorial Board consists of thirty-six outstanding scholars in the field of Economics and various social science fields. They actively participate in refereeing the papers Publications and Research Information submitted to the Review for publication; they also render valuable advice on other related matters.

Publisher Information

The Pakistan Institute of Development Economics was established at Karachi in 1957 and in 1964 accorded the status of an autonomous research organization by the Government of Pakistan. It is devoted to theoretical and empirical research in Development Economics in general and on Pakistan-related economic issues in particular. In addition to providing a firm academic basis to economic policy-making, its research also provides a window through which the outside world can view the nature and direction of economic research in Pakistan. Other social sciences, such as demography and anthropology and interdisciplinary studies increasingly define the widening scope of research that must be undertaken for proper economic policy and development to have sound underpinnings. Over the past 50 years PIDE has earned an international reputation and recognition for its research. Our faculty is rich and our advisory committee consists of world renowned economists such as Nobel Laureate Robert A. Mundell. PIDE is located at the Quaid-i-Azam University Campus in Islamabad, the capital of Pakistan. The campus rests against the backdrop of the Margalla hills on the Potohar Plateau, within a short distance of the remains of Taxila, which once housed the world's oldest university. Archaeological remains discovered in this area show that it has been a center of civilization for some 5,000 years. The Institute, neighbor to several other academic outfits situated in this historic and scenic part of the green foothills of the great South Asian mountain ranges, is the hub of economic and social science research in this part of the world.

What Is a Budget Deficit?

A budget deficit occurs when expenses exceed revenue and can indicate the financial health of a country. The term is commonly used to refer to government spending rather than businesses or individuals.

Budget deficits affect the national debt, the sum of annual budget deficits, and the cumulative total a country owes to creditors. 

Key Takeaways

• A budget deficit occurs when expenses exceed revenue.
• Certain unanticipated events and policies may cause budget deficits.
• Countries can counter budget deficits by raising taxes and cutting spending.

How Budget Deficits Work

Understanding Budget Deficits

When a budget deficit is identified, current expenses exceed the amount of income received through standard operations. To correct its nation's budget deficit, often referred to as a fiscal deficit, a government may cut back on certain expenditures or increase revenue-generating activities.

A budget deficit can lead to higher levels of borrowing, higher interest payments, and low reinvestment, which will result in lower revenue during the following year.

The opposite of a budget deficit is a budget surplus. When a surplus occurs, revenue exceeds current expenses and results in excess funds that can be further allocated. When the inflows equal the outflows, the budget is considered balanced.

In the early 20th century, few industrialized countries had large fiscal deficits, however, during the First World War, deficits grew as governments borrowed heavily and depleted financial reserves to finance the war and their growth. These wartime and growth deficits continued until the 1960s and 1970s when world economic growth rates dropped.

$726 Billion

The U.S. federal government ran a deficit of $726 billion for fiscal year 2022, an improvement of approximately 71%, from the deficit of $2.5 billion that was recorded for fiscal year 2021.

What Causes a Budget Deficit?

Both levels of taxation and spending affect a government's budget deficit. Common scenarios that create deficits by reducing revenue and increasing spending include:

• Tax structure that under taxes high-wage earners but overtaxes low-wage earners.

• Increased spending on programs like Social Security, Medicare, or military spending.

• Increased government subsidies to targeted industries.

• Tax cuts that decrease revenue but provide corporations with funds to increase employment.

• Low GDP, or gross domestic product, results in lower tax revenue.

Budget deficits may occur as a way to respond to certain unanticipated events and policies, such as the increase in defense spending after the September 11 terror attacks.

Effects of a Budget Deficit

Budget deficits affect individuals, businesses, and the overall economy. As the government takes steps to improve the deficit, spending for programs such as Medicare or Social Security may be curtailed. Improvements to infrastructure may also be affected.

To increase revenue, tax hikes may occur for high-income earners or large corporations which may affect their ability to invest in new business ventures or hire new employees.

A looming concern of a budget deficit is inflation, which is the continuous increase of price levels. In the United States, a budget deficit can cause the Federal Reserve to release more money into the economy, which feeds inflation and continued budget deficits can lead to inflationary monetary policies, year after year.

Strategies to Reduce Budget Deficits

Countries counter budget deficits by promoting economic growth through fiscal policies, such as reducing government spending and increasing taxes. Determining the best strategies regarding which spending to cut or whose taxes to raise are often widely debated.

To pay for government programs while operating under a deficit, the federal government borrows money by selling U.S. Treasury bonds, bills, and other securities. This strategy carries the risk of devaluing the nation’s currency, which can lead to hyperinflation.

Reduced regulations and lower corporate income taxes improve business confidence, stimulate further employment, and promote economic growth leading to higher taxable profits and an increase in income tax revenue.

What's the Difference Between the Federal Budget Deficit and the Federal Government Debt?

A federal budget deficit occurs when government spending outpaces revenue or the income drawn from taxes, fees, and investments. Deficits add to the national debt or federal government debt. If government debt grows at a faster pace than gross domestic product (GDP), the debt-to-GDP ratio may balloon, possibly indicating a destabilized economy.

How Does War or Military Spending Affect the Budget Deficit?

Budget deficits may occur with an increase in defense spending such as in the war in Afghanistan. At the end of George W. Bush's presidential term in 2009, the total amount spent reached over $900 billion. This sum increased the deficit to approximately $1.4 trillion by 2009 during the Obama Administration.

When Was the Last Federal Budget Surplus?

The last time the U.S. government had a federal budget surplus was 2001. In every year since, there has been a federal budget deficit.

What Can the Government Do About a Budget Deficit?

The government can work to cut back the budget deficit by using its fiscal policy toolbox to promote economic growth, such as scaling back government spending and raising taxes.

What Causes a Budget Deficit to Improve?

Budget deficits, reflected as a percentage of GDP, may decrease in times of economic prosperity, as increased tax revenue, lower unemployment rates, and increased economic growth reduce the need for government-funded programs such as unemployment insurance.

The Bottom Line

Budget deficits occur when expenses exceed revenue and for a nation, they can lead to economic instability, such as inflation. Using fiscal policy to promote economic growth to increase tax revenue and decrease spending can decrease a deficit.

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