Every year, the Government puts out a plan for it's income and expenditure for the coming year. This is, of course, the annual Union Budget.
"A budget is said to have a fiscal deficit when the Government's expenditure exceeds it's income."
When this happens, the Government needs additional funds. The Government can arrange these funds by borrowing. The Government can borrow either from the citizens themselves or from other countries or organizations like the World Bank or the IMF. The money borrowed by a nation's Government is called public debt. As on any other debt, the Government promises to pay a certain rate of interest.
To pay this interest in the future, the Government has three options:
It can mean that the Government is spending money on unproductive programmes which do not increase economic productivity. It can also mean that the tax collection machinery is not effective so that a significant proportion of people get away without paying their due taxes.
In any case, a large fiscal deficit significantly increases the chances of inflation in the economy which is an invisible tax on every citizen. In milder forms, high inflation and a large fiscal deficit lead to a weaker national currency (imports become expensive) and reduce the creditworthiness of the country.
VISIT:
"A budget is said to have a fiscal deficit when the Government's expenditure exceeds it's income."
When this happens, the Government needs additional funds. The Government can arrange these funds by borrowing. The Government can borrow either from the citizens themselves or from other countries or organizations like the World Bank or the IMF. The money borrowed by a nation's Government is called public debt. As on any other debt, the Government promises to pay a certain rate of interest.
To pay this interest in the future, the Government has three options:
- increase the amount of taxes collected by increasing the tax rates;
- help stimulate economic growth so that tax collection automatically increases with it; or
- print new currency notes to pay back the debt – also called debt monetization.
The first option is not desirable. That leaves the second and third options. While the second option sounds like the best one, it is easier than said done. The third option is dangerous and
can act like an unfair and invisible tax on the people of a country. The effect of debt monetization is inflation, which acts like an invisible tax on all the people of a country.
Fiscal deficit is not necessarily a bad thing. However, a large and persistent fiscal deficit can be an indication of several worrying signs in the economy.
Fiscal deficit is not necessarily a bad thing. However, a large and persistent fiscal deficit can be an indication of several worrying signs in the economy.
It can mean that the Government is spending money on unproductive programmes which do not increase economic productivity. It can also mean that the tax collection machinery is not effective so that a significant proportion of people get away without paying their due taxes.
In any case, a large fiscal deficit significantly increases the chances of inflation in the economy which is an invisible tax on every citizen. In milder forms, high inflation and a large fiscal deficit lead to a weaker national currency (imports become expensive) and reduce the creditworthiness of the country.
VISIT:
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