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Budget deficit – the excess of government spending over revenue; the main
causes of government budget deficits include:
? Commitment to social welfare programmes
? Demographic trends
? Fundamental macro economic shifts eg slower growth in productivity,
volatile inflation, increasing structural unemployment; together these factors
have driven government revenues well below targets projected during
budgets.
? Debt servicing obligation – when inflation is unstable, for instance, creditors
lose money and become wary about future lending, either demanding higher
interest rates to cover the added risk of inflation surprises or choosing not to
lend at all. Because continued liquidity in the credit markets is vital to
economic growth, governments cannot raise interest rates for any length of
time without disrupting financial markets. The real growth rate also affects
the accumulation of government debt. If an economy grows more slowly
than the real interest rate, the national debt grows faster than the
government’s ability to pay it back.
Inflation also raises payments for indexed benefits, since their levels are by
definition tied to inflation.
The problem is not that governments occasionally engage in deficit spending
during recession or times of national emergency but that they do so
continuously; what is crucial here is for developing countries to have budget
deficits that are manageable and opportunity cost-effective.
Fiscal policy in developing countries faces unique challenges . Budgets are
smaller, personal incomes are lower and tax collection is often erratic. Much
employment occurs outside the formal economy, making transactions difficult
to tax;
Financial markets in developing countries are often inefficient, making it hard
for governments to do without budget deficits or even finance such deficits.
Gregorymasila1 answered the question on March 2, 2018 at 18:22
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