What are the implications of a fiscal deficit? Explain any four.
What are the implications of a fiscal deficit? Explain any four.
A high fiscal deficit can have the following implications:
1. Inflation: The primary source of borrowings for the government is the central bank. The government borrows from the central bank through deficit financing, which is the printing of new currency. This leads to an increase in money circulation in the economy thus leading to inflation.
2. Burden of debt on future generations: A mounting debt poses a very large burden on the future generations, who become liable to repay the existing obligations- the principal amount and the interest.
3. Increased risk of debt trap: Higher borrowings mean a larger amount of interest payments, which contributes to the revenue expenditures. The revenue deficit will rise. The fiscal deficit will then rise further, for which borrowings will have to be made again. This vicious cycle goes on and spirals the economy into a debt trap.
4. Crowding-Out: High deficit leads to further borrowings by the government. This reduces the availability of funds in the money market for private firms. A lower supply of money leads to a higher interest rate. This increased interest rate will discourage private firms from undertaking investment projects, thus "crowding-out" investment.
A high fiscal deficit can have the following implications:
1. Inflation: The primary source of borrowings for the government is the central bank. The government borrows from the central bank through deficit financing, which is the printing of new currency. This leads to an increase in money circulation in the economy thus leading to inflation.
2. Burden of debt on future generations: A mounting debt poses a very large burden on the future generations, who become liable to repay the existing obligations- the principal amount and the interest.
3. Increased risk of debt trap: Higher borrowings mean a larger amount of interest payments, which contributes to the revenue expenditures. The revenue deficit will rise. The fiscal deficit will then rise further, for which borrowings will have to be made again. This vicious cycle goes on and spirals the economy into a debt trap.
4. Crowding-Out: High deficit leads to further borrowings by the government. This reduces the availability of funds in the money market for private firms. A lower supply of money leads to a higher interest rate. This increased interest rate will discourage private firms from undertaking investment projects, thus "crowding-out" investment.
