7.1: Elaborate what you understand by deficit financing.
What do we mean by deficit financing this is a strategy or ways to management of money which when spending is more than collected at the same period of time. In order words this is referred to budget deficit, this approach is used in business that is small, household budgets, in corporations and also in, governments sector mostly in all the level. If deficit financing is used in the right way it will help to launch a chain of the event and this will help in financing situation instead of any debt may cause problem or difficult to pay. Mostly common or know example of government deficit financing is how the government stimulate the economy of that country or nation to put a stop to any recession that country is facing. The government has a set aside a plan which will involved using borrow resource’s to purchase, the government can use different strategy like increasing demand output for product in all business sector of that nation. It also helps in the motivation of many business in order for them to hire more employees and it will reduced the level of unemployment in the country during the period of recession. Further more, the consumer confidence and trust will be restored in the market place because of the safe transformation, and these make it safe for the buyer to buy more goods and services. If the economy of a country in closely looked into and the deficit financing is carefully monitored, it will bring back economy stability in the country over short period of time like few month or few years.
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Deficit spending in economic does not only occurred in the government sector only but also in all business as well A company may plan to spend a certain amount of money as a kind of upfront thinking that they will be able to generate the fund back for investment .An investor or company owner may decide to buy a new machine for the company production with the hope that a new machine will hasten and make the production of goods in a less period of time with larger unit of goods, and with less cost. This kind of idea or strategy in business help the business to flourish and the manufacturer will be able to pay off his debt and have budget surplus instead of deficit, the owner of the business will be debt free and enjoy the surplus.
7.2: The limitations of Deficit financing being an instrument of economic development.
In any given economy, there is a kind of between the government, project output There is always a time lag between Govt. investment and the output from the projects. If the government prints more money out it will cause inflation in that economy and this situation usually affected the poor people in that society. The rich will be richer and the poor will be poorer. The buyer straight will be reducing to greater level and the businessmen profit margin will increase. In any society there is always the people that have and those who do not have so any increase made in price domestic’s goods leads to importation of cheap goods and the domestic goods high price will reduced the export. This in turn leads to adverse in balance of payments. Never the less this will affect the cost of the production because the raw material used in process of production has being increased, so the goods will be increased as well, perhaps it will definitely reflect on foreign investment, it will be less attracted by other country.
Listed below are the disadvantages of deficit financing and some other cogent reasons to be alert about a National debt.
The interest Payment.
In a society people do not lend to the government with the charity. Government must pay interest on every debt they are involved in just like any one in the society, it was recorded that last year government spent the sum of £31 billon on interest payments alone. Looking at this in a perspective manner it will equate to 15 p on income tax. This amount is more than what UK spends on National Defense. The government borrowing for the year 2007/08 going to be £42 billion same amount the government pays in interest.
The Crowding Out.
The government debt always affect the private sector because they sell bond to the private sector in order for the government to borrow money and this in turn lead to less private investment because the government has bombard them with the bonds. Also the private spending is more efficient than the government level of spending because the government result to inefficient spending .this is what we called crowing out, the private investor is crowded out with government bonds because the government needs to borrow
the financial crowding out.
The financial crowding out is when the government want to borrow large sum of money and they tried to increase the interest rate on bonds in order to attract many lender. The bonds rate is increased this will definitely put pressure on the interest rate generally, in order words this increase in the interest rate will affect the economy of that country because people will reduced their way of spending, investment level will be low and later run the economy growth will be low.
The tax rises for the future.
The tax rises for the future look into how the public sector debt is being paid. Any increasing public sector debts indicated that the future taxpayer will be the one to bear the burden by paying the bill. No matter the situation of the public sector debt reduced or not, the future taxpayer will be the one to pay the interest on the debts. Further this will a problem because, has it was mentioned above, changing of demographics show that government finances is usually placed under pressure, though without borrowing from at that moment of time.
Limits Fiscal Policy
In a normal situation the government should be able expand the fiscal policy in a situation where the economy is facing problem or recession. When a government has urge public debt they tried to reduced the scope by lowering tax in order to enhance demand. Then government must increase taxes and cut their spending in order to meet up with the budget .this is advisable because of the existing problems in the market economy.
7.3: Suggested recommendations to eliminate a federal deficit
In summary, I like to recommend these three-step formulas for prosperity:
1) Elimination of federal taxes.
It will good to cancel government taxes because when the citizen gives money to the government is just like “throwing coals to Newcastle.” Government is the maker of money, they are the producer that has no limitation to their production. . When the citizen sends taxes to the government, they just used it to pay debt. When you send your tax money to the government, the government simply uses it to pay down debt. When paying down debt it destroys the economy money in a given society. In order words taxes damaged money in the society.
More so, the federal tax system is a waste of resources, it will be good if the government can spend the billions of dollars spent on compliance on production of useful goods for citizen and this will ease the problem of the economy and the people. Visualize millions of people shoveling dirt into a hole, while millions more shovel it out. That is our tax system.
The first suggested tax that should be eliminated is; the Medicare taxes and Social Security taxes. These will be politically popular; also regressive taxes directly impact businesses on low and the middle income people. That politician that ends FICA will becomes a hero.
This will give federal government the opportunity to create money to support retirement and health care sector.
2) Elimination of federal borrowing.
Government being a producer of money, an established government will not need to borrow money. These are inefficient; they are harmful, the exercise which provides no economic benefit. The Federal government borrowing provides semantic impression that government is in debt, and people it find repugnant.
If there no borrowing; there would not be debt.
3) Establishing a national, money-supply goal.
It is good to organize a congress, a congress that will look into the checking account called money created,” They will add money to this account when needed. They will write checks and make a kind of transfers from the Money Created account in payment for all goods and services.
This will be the suggested system for federal money creation in our economy. The congress will be the one to determine on how much money to be added to the Money Created account, however giving Congress power over money creation. Thus, the Federal will continue to control the interest rates and inflation.
The congress will spend what is necessary on retirement, the military health care, crime prevention, education, the infrastructure, and other national needs.
The country will be free the tyranny of semantics and the problem of federal debt. This society prosper has rapid growth in their economy.
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