Economic Effects of a Budget Deficit

Topics: Money, Economics, Public finance Pages: 3 (754 words) Published: December 14, 2010
The immediate effect of a budget deficit is the negative perception of the general public, both local and international, on the ability of government to manage its fiscal affairs which seriously impairs its financial and credit rating including its ability to borrow more money to service the country’s foreign debt. Government is unable then to forthwith address the deficit and, as in the Philippines, starts blaming everybody else but itself for its budgetary woes. Still, during times of a budget deficit, the Philippines most particularly makes a knee-jerk reaction by trying to desperately narrow the gap between revenues and expenses through two measures that, far from helping alleviate the situation, actually exacerbates the already contracting and sluggish economy. In attempting to balance the budget, government tries to increase its revenues by imposing additional taxes upon the citizens and private businesses and, at the same time, tries to lessen expenses by cutting-down on expenditures. This twin cosmetic measures, while seemingly logical at first blush, are actually self-defeating and counter-productive as they result to further economic miseries for the country and people. In the case of government measures to cut-down on all expenses leaving only what it deems are the most necessary government budgetary expenditures, its unintended effect and consequence is the further contraction and constriction of the economy as then both the government and the private business companies would now together refuse and be reluctant to do the investing thereby grinding economic activities to a slow-down, if not a standstill and halt. The symbiotic relationship between government and business is abruptly disrupted with this natural reaction of government to forthwith attempt to balance the budget. Indeed, government’s tendency to cut-down expenses in times of sluggishness in the business cycle is contrary to the successful Keynesian theory and formula that it is...
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