Question

Discuss why the reducing the debt, or balancing the budget, should not be considered during a recession, especially this one. What are the main causes of our current deficit?

Answer 1

Recession means negative output growth over two consecutive quarters. Negative output growth means fall in the GDP triggered by fall in the consumption, investment, low exports etc. Thus government with tools at its disposal like decreases in the tax rate or increase in government spending uses to stimulate the economy. While operating expansionary fiscal policy to bring back the growth rate of output on track, government often faces budget deficit ie excess of expenditure over revenue. Without such exercise by the government, economy could not expand. Decreasing tax rate increases the disposable income of households. Thus households spend more and also save more. Spending on goods and services increased their demand and thus production in the economy, while savings are converted to investment which further expands capacity production. In the same way, increase in government purchases increases output level and thus helps economy overcome recession.

Main causes of current deficitdeficit is decline in revenue which results from economic contraction/recession.During slowdown phase, earnings of individuals decline and thus tax revenue on income collected also falls. Government has several expenditures like paying pensions, expenditure on public welfare etc. So revenue generated through taxes or through other sources like disinvestment falls short.