Impact of Budget Deficits

Impact of Budget Deficits Fiscal and monetary policies are used to control the economy but their effects on the federal government’s budget deficits can be huge. The use of fiscal policy to help solve the macro problems is common. Basically government spending is increased, tax cuts are put into place, and there is increases of transfers to lower employment are all fiscal stimuluses’ used to keep the economy from falling. Just the opposite is fiscal restraint where government spending is decreased, tax hikes are introduced and transfers are reduced to keep inflation under control. When the government uses fiscal stimulus to control the economy its budget is thrown out of balance (deficit spending). Now the government needs to borrow money to pay for all the spending that is more than they take in from taxes (Schiller, Hill, & Wall, 2013, p. 251). The short term effect are obvious, the government will be taking in less revenue. Over the long term creditors might raise their interest rates they are charging the government and since the nation’s economic output will probably be below its potential the government may be only paying interest on what they owe not principle (The 2013 Long-Term Budget Outlook, 2013). The use of monetary policy also has similar effects on the budget deficit. Monetary policy uses money and credit controls in order to control the economy (Schiller, Hill, & Wall, 2013, p. 315). By using monetary policy stimulus’s it is the intention of the government to get spending by the public increased. Their goal is to increase the money supply and reduce interest rates to increase aggregate demand. If this is all successful and the public spending is increased then the nation’s output is also increased but stimulus’s are usually short term fix in hopes of getting the economy moving again. According to the Congressional Budget Office (CBO) in a report dated

References: Schiller, B., Hill, C., & Wall, S. (2013). The Macro Economy Today. New York: McGraw-Hill/Irwin. The 2013 Long-Term Budget Outlook. (2013, September 17). Retrieved December 5, 2013, from Congressional Budget Office: http://www.cbo.gov/publication/44521