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  • Topic: United States public debt, Government debt, Public finance
  • Pages : 11 (3494 words )
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  • Published : February 21, 2013
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Public Debts and Budget Deficits
How dangerous they are and why? Cases and examples

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Abstract

How dangerous are budget deficits and public debts and why? This is a controversial question and a subject of debate among economists for many years. Some economists believe that when governments borrow money, they help push interest rates up as well as push private investments away. Moreover, on the longer run, this deficit and payments of interests will burden the budgets for future generations to come. Other economists see that public debts can be employed to help economic recovery and raise the employment rates. The borrowed money is used in ways that generate more jobs in order to bring an economy closer to its equilibrium state. A third set of economists claim that the effect of fiscal policy in the areas of public debts and budget deficits will have minimal impact on the economy!

In this paper, we aspire to the answer the question of how dangerous are budget deficits and public debts but in order to be pragmatic, we will focus on the following countries’ economies: USA, UK, Japan, Greece and Saudi Arabia. The conclusions drawn from our study show a negative impact on economic growth for countries with high public debt and budget deficits. However, this negative impact is more severe when public debt goes above a 90-100% threshold of GDP. It is also concluded that higher debts and deficits impact negatively the country’s private investment (crowding out effect) and lowers the economic productivity.

Table of Contents
Abstractii
I. Introduction1
[Type sidebar title]1
II. Literature Review3
III.1 A common denominator: the 2007-2009 US Housing bubble4 III.2 Japan6
III.3 Saudi Arabia: a buoyant economy despite the odds7
III.4 Greece: A Bankrupt Country8
External Debt9
Current Account9
Growth9
Credit Rating9
Consumer Confidence9
Corruption10
Unemployment10
Competitiveness10
III.5 The United Kingdom: Slow Recovery11
Fiscal policy12

Public Debts and Budget Deficits
How dangerous they are and why? Cases and examples
I. Introduction

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One of the main reasons for the ever increasing public debt is governments themselves. Government role and size in terms of staff has been increasing over the last 50 years mandating an increase in spending.

On an annual basis, governments follow a process to make fundamental decisions about raising and allocating money for their activities. This process results in a so-called budget that outlines what the government will spend as expenses and what it will collect in the form of taxes and other revenues. In general, the expenses part of the budget is usually quite clear ahead of time as it uses historical information and is easier to predict than the revenue and income part of the budget. The revenues and taxes part depends a lot on the general economic conditions, demand and supply as well as other business cycle related factors. As a consequence, policy makers try to get the budget to be balanced; i.e. they try to budget the expense to match the revenues or income. However, this is usually a difficult task and the result in most of the times is an imbalanced budget. Imbalanced budget means either expense are higher than income (called budget deficit) or income is higher than expenses (budget surplus). So, where is public debt in this scene? If the budget is in deficit, then the government will need to seek ways to bring more income and this can happen either through increasing taxes, selling public assets (privatization) or borrowing money (hence comes public debt expression). The problem is not the borrowing act in itself but rather the consequences of borrowing which is mainly interest payment. The below table shows the relationship between public debt and budget deficit for the five countries under study. The next table shows the real GDP growth for the same period....
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