The Importance of Balancing the Federal Budget

It is potential to balance the budget, which means there is neither budget deficit or budget surplus. In other words, revenue and expenditure should reach parity during a complete business cycle. Additionally, it is also important for The Federal government to concern yearly about budget deficit, when revenues are less than expenditures, because if deficits are not paid off and happen again and again, the government will accumulate debt. There are some arguments around this topic such as the conservative, liberal, and radical argument. First of all, the Conservative argument provides some adverse effects of deficit to prove that concern about budget deficit is important. First, deficit is considered as a source of inflation and unemployment. When government has large deficit, demand- pull presses on prices. Moreover, money supply is another reason of causing inflation. If a money expansion rate is greater than output increasing rate, it will lead to price expansion. In addition, excess demand inflation will lower real income and goods demand; therefore, employment will be lower. Second, deficit has impact on investment and business. There will be an increasing of competition between all borrowers (private government and the government), which leads the interest rate increases. The result is crowding out. Furthermore, government borrowing impacts on production, and this is the determinant of employment and output. As a result, deficit is the important factor of inflation, rising interest rate, declining investment, and lower output and employment. Second, the Liberal argument has different aspect. It indicates that debt is the cause rather than the result of economic condition. Moreover, there is a necessary of understanding the causes of debt which are cyclical and structural budget deficit. It is essential to identify the deficit is caused from cyclical or structural budget events. For example, if a budget in cyclical downturn period, we should balance by