Whether used in government, economics, or finance, the underlying principle of deficit spending is the same—less income, more spending. Economists have been debating on this topic for a long time already, with those against it saying this will hinder economic growth, while those for it argue otherwise.
For this article, we will discuss the advantages and disadvantages of deficit spending in the context of government, where a governing body of a nation that is in recession needs to borrow heavily from other nations or financing entities in order to spend on infrastructure.
List of Pros of Deficit Spending
1. It pushes growth in the economy.
Since a government will have the needed funds, it can spend on infrastructure and create more employment in the labor force. And with more developments happening in a country, more investors will be attracted, thus opening up more jobs and increasing revenue and economic growth rate. This is greatly beneficial during a recession.
2. It forces the government to have more control on spending.
Since the government needs to pay back the loan with high interest rates, it will be more careful when making investments and creating a budget. They need to make wise decisions when prioritizing projects and spending.
3. It provides protection.
If a country that is in recession is forced to go to war, and it does not have the finances to fund its military, it will not be able to protect its land and citizens. With deficit spending, a government can have the means to pay for its armed forces so it still has security and the capability to fight.
List of Cons of Deficit Spending
1. It can result to a bad economy.
A country will typically have no savings during a deficit period since they must prioritize paying off the debt and interest. So when there are emergencies, it will have no funds and must borrow from other nations or financing institutions again, creating a vicious cycle. Another adverse effect is the tendency of the government to hike up taxes, reduce public services, and increase prices of commodities, which leads to inflation and a lower standard of living.
2. It reduces investments.
If a government is not able to wisely manage their loan, their debt will greatly increase leading them further into a recession. As a result, they will have less money to spend on infrastructure and discourage investors from doing business in their country.
3. It can risk national sovereignty.
Nations or financing institutions that lend money to a country in recession can make certain demands before approving a loan. For example, the government in debt may have to change its spending policies and laws. It may also have to sell off its land and other assets in order to pay off the debt.
Some economists say that deficit spending can work if the money is spent on the right kinds of projects that will spur economic growth. But if left unchecked, a government’s debt may become a threat to the economy of a country.
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer and banker. If you would like to reach out to contact Natalie, then go here to send her a message.