BUDGET DEFICIT
GAVIN KEETON: Correct for the president to redirect spending to boost domestic production
In some circumstances cutting government spending in line with lower taxes would exacerbate the slowdown in economic activity
The IMF warns that governments should avoid running high budget deficits for long periods. High deficits require increased borrowings to fund them, so debt rises rapidly each year. Interest on these borrowings increases, reducing government spending on other priorities such as education and social welfare. National budgets should also accommodate fiscal “space”. In good times governments should reduce deficits to create future capacity for expansionary policy when a weakened economy requires it. Such an occasion is when an economic downturn is caused by weakening domestic spending. This reduces companies’ profits and the taxes paid on profits. Rising unemployment squeezes personal tax contributions, while reduced household spending affects VAT collection negatively. This overall fall in tax revenue makes it difficult for the government to fund its spending obligations. In such circumstances it is unwise to cut government spending in line with lower taxes, as this would exacerbate th...
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