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Budget Deficit Analysis

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The federal government 's budget shows the relationship between its expenditures and its tax revenue. During a recession, the federal budget tends to be more in a deficit, and the opposite is true during goods economic times, as the deficit tends to be smaller, or moves to a surplus.To say that the federal government should never run a deficit, and that a law should be enacted to state this is ludicrous. What makes the statement ludicrous is the fact that during a recession, not running a budget deficit is impossible, and that the government doesn 't have to think about, or take any deliberate action to enter a deficit during a mild recession. Automatic budget deficits can arguably benefit the economy more than an automatic budget surplus, …show more content…

Consider the economy enters a recession, thus the government automatically moves into a budget deficit. In order to balance this deficit, the government would have to raise taxes or cut spending, but both of these actions would reduce aggregate demand, making the recession worse. Now assume GDP increases above its potential level, the budget is automatically moved into surplus. To eliminate this surplus, the government would have to cut taxes or increase spending. These actions would increase aggregate demand, thereby pushing GDP even further beyond potential GDP and increase the risk of higher inflation. To balance the budget every year, the government might have to take actions that would destabilize, or even destroy the …show more content…

Borrowing to pay current expenses is a bad idea, but isn 't necessarily a bad policy when the expenses are for long lived capital goods. By similar reasoning, when the government contributes to the building of a new highway, bridge, or subway, it may want to borrow funds.The alternative is to pay for these long lived capital goods out of the tax revenues received in the year the goods were purchased. But this means that the taxpayers in that year have to bear the whole burden of paying for the projects, even though taxpayers for many years in the future will enjoy the

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