Question

a.

The Australian government has recently announced a raft of fiscal expansionary/stimulus measures that will lead to a significant increase in the Australian government’s budget deficit. Given the material presented in this course cover the pros and cons of budget surpluses and deficits, we know that one view put forward is that ‘government budget deficits are bad. Do you agree or disagree with this statement? Briefly justify your answer.

Answer 1

For an economy the budget deficit is bad.

According to:
The budget deficit is the situation when the expenditures exceed the revenue. Deficit results in government debt that has to be paid along with the interest. Budget deficit leads to difficulty raising funds because this causes creditworthiness to fall. If the government wants to reduce the deficit it must either reduce the expenditure or raise taxes. But these will have future consequences when expenditure drops, aggregate demand drops, resulting in lower GDP and lower government revenue and more deficit. When taxes rise, people's disposable income falls, resulting in household demand falling and lower GDP resulting.