Question

Government is faced with constraint when making expenditure. If there’s a deficit in government expenditure, it must be financed. How do government finance its deficit? Explain using the constraints faced by the government.

Answer 1

deficit means when total expenditure is more than total receipt, so this situation is known as deficit.

There are various ways to finance deficit -

• Increase Tax Rate - By increasing tax rate, government can solve the problem of deficit, tax increases the receipt of government, which directly reduce the deficit but increasing tax rate may put more burden on public, so it may create problems in country.
• Reduction of government or public expenditure - By reducing public expenditure, so government can solve out the problem of deficit. Decrease in expenditure leads to cutting of total expenditure, which are beneficial for reducing deficit but reduction in government expenditure may decline the growth of country, so it is not easy for country to reduce public expenditure.