Macroeconomics - Managing Public Debt
Managing Public Debt
There are three ways to manage public debt. These budget philosophies are the Annually Balanced Budget, Cyclically Balanced Budget and Functional Finance. Each policy has its advantages and disadvantages which attempt to achieve a deficit during recession and move towards a surplus during inflation, which is the essence of counter cyclical fiscal policy.
Based on a traditional orthodox view, the Annually Balanced Budget sees the government control its budget on a yearly basis, which is considered an advantage.
Balancing the budget on a yearly basis encounters many disadvantages including intensifying the business cycle and inflation. When the economy enters a period of rising unemployment, incomes will fall and tax receipts will diminish. For the government to balance its budget it must either increase tax rates or reduce government expenditure or provide a combination of the two. However the contractionary nature of the two means that instead of stimulating, aggregate expenditure will continue to decrease. When inflation is escalating, money incomes rise and so does tax collections. The government will either increase government expenditure or decrease tax rates to avoid a surplus or provide a combination of the two.
The Annually Balanced Budget can be seen as pro cyclical instead of counter cyclical, increasing the business cycle and inflation, placing pressure on the economy. It can be seen as not the best option for creating a healthy economy.
The Cyclically Balanced Budget sees the government balancing the budget over the course of the business cycle, whilst exerting a counter cyclical influence. The advantages of this policy include offsetting a depression; the government should lower taxes and increase spending to incur a deficit. Also within an inflationary period taxes should be raised, government spending cut to counteract the deficit gained during the recession.
The disadvantages associated with the Cyclical Balanced
There are three ways to manage public debt. These budget philosophies are the Annually Balanced Budget, Cyclically Balanced Budget and Functional Finance. Each policy has its advantages and disadvantages which attempt to achieve a deficit during recession and move towards a surplus during inflation, which is the essence of counter cyclical fiscal policy.
Based on a traditional orthodox view, the Annually Balanced Budget sees the government control its budget on a yearly basis, which is considered an advantage.
Balancing the budget on a yearly basis encounters many disadvantages including intensifying the business cycle and inflation. When the economy enters a period of rising unemployment, incomes will fall and tax receipts will diminish. For the government to balance its budget it must either increase tax rates or reduce government expenditure or provide a combination of the two. However the contractionary nature of the two means that instead of stimulating, aggregate expenditure will continue to decrease. When inflation is escalating, money incomes rise and so does tax collections. The government will either increase government expenditure or decrease tax rates to avoid a surplus or provide a combination of the two.
The Annually Balanced Budget can be seen as pro cyclical instead of counter cyclical, increasing the business cycle and inflation, placing pressure on the economy. It can be seen as not the best option for creating a healthy economy.
The Cyclically Balanced Budget sees the government balancing the budget over the course of the business cycle, whilst exerting a counter cyclical influence. The advantages of this policy include offsetting a depression; the government should lower taxes and increase spending to incur a deficit. Also within an inflationary period taxes should be raised, government spending cut to counteract the deficit gained during the recession.
The disadvantages associated with the Cyclical Balanced
Bibliography: * Textbook: Jackson & Mclver ‘Macroeconomics Edition 8’ McGraw – Hill Pty Ltd 2007 . * Websites: * www.australianbudget.com/report * www.economist.com.info * www.1800australia.com