Introduction
The budget deficit and the amount of public debt is an important indicator of an economy. This area of concern has traditionally received much attention. The budget process involves the balancing of public revenues and expenditures. Budget imbalance means quantitative disparity between income and expenditure budget. The excess of expenditure over budget revenues is called the “budget deficit.” The unbalanced budget could lead to the emergence of a surplus, ie excess of income over the expenditure. However, in practice, almost all countries now, there is significant scope for excess government expenditure over income. The result is a rapid increase in budget deficits. There are many reasons (the decline of social production, mass production of “empty” money unnecessarily increased the cost of financing the defense industry, major social programs, large-scale circulation of the “shadow” of the capital, the huge overhead costs, loss of registration, theft, etc.), but crucial growing role of the state in different spheres of life, the expansion of its economic, social functions, the increase in military spending, the size of the state apparatus.
Budget Deficit
The budget deficit, of course, belongs to the so-called "negative economic categories" such as inflation, crisis, unemployment, which, however, are integral parts of the economic system. It should be noted that without the budget deficit it does not mean the "health" of the economy. We must be clear on what processes occur within the financial system, which changes the reproduction cycle reflect the budget deficit. There are several traditional ways to cover the budget deficit - is government loans and tightening of taxation. However, there is a third method for increasing the money supply - is its own production of money, or "seignior age." "Seignior age" today does not take the form of simply printing money, because it is too obviously linked to inflation. Currently "seignior age" is realized through the creation of reserves of commercial banks. Suppose that the U.S. Treasury to $ 100 million to cover certain government spending. It prints this amount treasury bills and sells the Fed is buying them, paying for placement loan notes by the Treasury. The Treasury, in turn, writes checks on that. Recipients of checks invest the funds in commercial banks. At the end of the clearing of checks is that created $ 100 million of new bank reserves. They are the basis of a multiple increase of the quantity of money in circulation.
Types of Budget Deficit
- Actual - the actual difference between spending and revenue in the period,
- Structural - hypothetical deficit, resulting in an environment where revenue and expenditure are carried out with the full use of the capacity of the economy,
- Cyclical - is the result I cycle affecting the budget expenditure and revenue, and thus occurs in conditions where the economy is not operating at full capacity utilization. It is the consequence of a sting on automatic stabilizers.
The Causes of the Budget Deficit
- Excessive expenditure - for example, due to militarization of the economy
- Development administration or high social transfers
- Too low taxes
- The existence of powerful groups demanding and the associated excessive expansion of the social functions of the state.
Difficulties with Clear Economic Interpretation Related Deficits Include the Following Facts
- Period of one year is too short to assess the cause of the deficit
- Financial year is generally not congruent with the business cycle
- It is difficult to interpret the different types of deficit budgets (e.g. current, wealth), and the relationship between the budget balances
- In addition to the budget deficit should be considered as transfers, especially between the state budget and local government budgets and social security funds
- The deficit is related to the monetary policy of the state (incidence rate, which leads to a weakening of economic activity - a reduction of revenue)
- The state budget affects the external environment of the level k Ursu rate.
Methods of Financing the Budget Deficit
- Among the ways to finance the budget deficit stands out most often:
- Issuance of Treasury securities purchased by non-bank entities, ie, households, non-financial companies and institutional investors
- Issuance of Treasury securities purchased by commercial banks
- The use of commercial bank loans
- The use of lending by international financial institutions
- Proceeds from the privatization of state assets
- Borrowing at the central bank or issuing securities purchased by the bank, because in many countries, there is a statutory prohibition of financing of the budget deficit by the central bank.
The Primary Deficit Financing Instruments
Treasury bills are short-term securities issued by the state in order to meet the current needs of payment. Maturity (redemption) of T-bills does not exceed one year, but is generally three to six months, although it may also be a few days. Treasury bonds are securities of an issuer, which includes an undertaking to pay the holder the face value of the bonds with interest. Terms of payment are set out in relation to a series of bonds or general subscription basis.
Consequences of the Budget Deficit
The processes of stabilization and economic growth determine the causes of the deficit, its durability, depth and the method of financing public debt. On the other hand, economic growth alone should lead to an increase in tax revenues and reduce certain types of expenditure, thus the size of the deficit and debt reduces. However, in the area of regulatory deficit is a kind of limited effectiveness of fiscal policy on the one hand, and on the other active instrument in determining its effects.
Effects of Deficits
- Frequently mentioned are four main negative effects of deficits
- Acceleration of inflation by its monetization (money supply growth)
- The occurrence of a push,
- Negative impact on the current account of balance of payments, as a result of the so-called mechanism
- Twin deficits (i.e.) the budget deficit and the current account deficit)
- The so-called danger. sovereign debt trap by the rapid accumulation of public debt and its servicing costs
Quite widely accepted that the impact of the deficit on inflation depends on how it is financed. According to deficit, financing by open market operations is less inflationary than debt monetization. This view differs from the positions of the representatives of the new classical economists, who believe that any method of financing the deficit causes inflation. Many economists believe that the deficit is the primary cause of inflation, while a prominent economist of the American discussion, the representative of the new classical economics. According to a controversial hypothesis of neutrality of public debt, the financing of the deficit does not affect the results. Taking out loans in the private sector or the additional issue of money is no different from the budget to cover increased expenditure of tax revenue. A plane dispute concerns supply be linked to the effects of deficits and is the phenomenon known as crowding or pushing effect (crowding out effect.) In the most general sense, this effect is reduced to reduce the possibility of spending in the private sector caused by an increase in public expenditure. The third ground of public finance deficits attributed to incorporate a substantial impact on the current account of balance of payments. The budget deficit may contribute to the formation of a negative balance - a twin deficit.
The debt trap can occur for two reasons: the rapid increase in market interest rates or deficit. The increase in the market interest rate causes a significant increase in debt servicing costs and thus may lead to an increase in the deficit and accelerate the growth of public debt. Situation this can be countered by appropriately shaping the structure of the debt. The higher the share of Treasury securities with longer maturity, the lower the sensitivity of the average interest rate debt to changes in current market rates and the lower the risk of the debt trap. Budget deficits are now quite commonly penalized. For a healthy fiscal policy, consideration is to avoid deficits. Presenting the views of a different approach and demonstrating the positive properties of small deficits occur in the very long term, preached by a few authors. Their supporters believe that such deficits are not harmful to the economy, and in some circumstances may increase the propensity to save of households and provide a risk-free investment.
Public Debts
The government of a country contracts public Debt. It usually includes not only loans taken by the central government but also those who develop regional or municipal, autonomous institutes and companies in the state, since they are formally guaranteed by the national government. Public debt usually divided into short and long term as well as in domestic public debt owed to creditors of the country, and public debt external, contracted with foreign lenders. It is widely practiced in the modern world that states spend each year, and more money than they collect, due to political and social commitments assumed. The policies Keynesian, moreover, that advocated budget deficit as a means to enable economic growth, have also contributed greatly to the indebtedness of modern states. Due to the weight of debts incurred before it is common among the expenses of the state, a considerable departure appears dedicated to payment of interest and principal of the debt assumed.
The inelasticity of various tax expenditures and failure to increase the pressure tax beyond a certain point, usually lead to a growing circle of debt, as governments find it impossible to meet such commitments and current expenditures through the income perceive ordinary. Governments generally seek to consolidate short-term debt turning them into long-term debt, easier to manage, but in any case, when the total domestic debt exceeds a certain level, they often resorted to additional emissions of national currency In order to meet these commitments. This causes undoubtedly inflationary pressure type, as new issues occur without a backup currency or goods produced by the country. In the case of foreign debts, to be paid in dollars or other currencies, it is impossible to use, except for the United States, of course, known to this file. For this reason, Latin American countries and elsewhere-that accumulated in recent decades growing deficits in its external transactions, they were forced to make profound adjustments in their economies from the last years of the eighties.
The essence of public debt
Public debt is a financial obligation for public authorities directly contracted loans and loans, issuance of securities by public sector entities maturing obligations. The cause of debt is borrowing to cover budget deficits. Loans are not included in revenue but are part of the proceeds of revenue. Proceeds from the financing of public debt caused costs that must be covered in the future. Adopting the budget deficit, public authorities are responsible for the financing, or finding sources of loans and their repayment with interest.
Types of Public Debt
A debt can be classified according to various points of view. Depending on the duration of the debt, which is the period of time that is between the emission and the time at which the state reimburses, we can distinguish three categories of debt:
- Consolidated: made up of loans for which the State assumes the obligation to pay interest, reserving the right to reimbursement when appropriate. Obviously, whoever is holding a debt consolidation can always sell it and then get back to the market price of the capital lent. However, this type of debt has the disadvantage of a decrease in the real value of the title due to inflation and therefore, this form has fallen into disuse.
- Redeemable: made up of loans that must be repaid over a specified period. It may be repayable in a lump sum or through amortization schedules.
- Fluctuating: is a debt repayable at intervals, fixed, that the state shrinks, for a short period, to make up for the temporary cash.
Another distinction is the rise of internal debt or external debt, between these two debts you have the time of repayment.
- The internal debts involving transfers of resources within a State from the private to the public sector external debt, however, they increase the resources available temporarily as they make possible a surplus of imports.
- External debt as a personal debt and must be repaid to others through future revenues or new loans. The internal debt, however, is the debt of a country to itself, for which the interest and principal to be paid by taxpayers to bondholders.
This distinction shows a reduction of income and balance of payments problems that may arise in the case of financing the foreign debt. Today have remarkable role foreign loans granted by international bodies such as the International Monetary Fund (International Monetary Fund). Another distinction that can be made is to distinguish the debt in three categories: active debt, debt and debt-to-weight passive dead. The debt assets are loans that finance capital spending aimed at creating or improving the production efficiency of a country, so this debt will be fruitful in the future and will be able to provide for the regular payment of the service of the same. This debt can be created, for example, schools, hospitals, or to improve the functioning of natural resources. The debt liabilities are finalized at the expense of producing a utility for the community, but do not produce productivity or economic returns. The debt-to-weight dead last, is due to expenses that are not aimed at any usefulness in society. This type of debt is due in large part to military spending.
Causes of Public Debt
The problem of public debt gained urgency in the second half of the twentieth century, when the states were unable to accumulate in the budget sufficient financial resources to carry out its functions and began to use debt policy.
- Government debt - the total amount of outstanding obligations of the Government in the domestic and foreign market. The main reasons for the emergence and growth of public debt are:
- Permanent budget deficit
- Fiscal policy aimed at reducing the tax burden without a corresponding reduction in public expenditure
- The impact of political business cycles (increased costs before the election in order to gain popularity with the voters);
- Militarization, the introduction of wars etc.
- Public debt can be internal (debt issued and outstanding government loans) and outside (the country's financial obligations to foreign creditors).
- The amount of government debt is an important indicator of the overall state of the economy. There several indicators to measure public debt: debt per capita (total debt for every citizen of the country); the ratio between debt and individual income (part of the total outstanding amount of money for every 1000 units of individual income); the ratio of debt to GDP (this figure depends on such factors as the level of the real interest rate, which affects the amount of payments on the debt, real GDP growth, the volume of the primary deficit)
Management of Public Debt
Public debt management is to ensure the solvency of the state that is the ability to repay debt. This applies to both current and capital duty. In the management of internal and external debt, there are some specific features. Solvency is ensured by internal borrowing, usually from domestic sources. Solvency of the foreign debt depends primarily on the foreign exchange. Possibility of repayment of this debt is defined in the trade balance. Its surplus describes the resources that ensure the solvency of the state and thus make it possible to settle the balance of payments.
Debt service is a set of actions of the state to repay the loan, the payment of interest on them and change the repayment terms of loans issued, repayment of loans at the expense of budget funds. In some cases, the state has resorted to refinancing the public debt that is debt repayment through the issuance of new loans. Interest payment of winnings to pay off the loans is the main part of the cost of servicing the public debt. Other costs include the production, delivery and sale of securities of the state, holding winning runs, runs blanking and other costs. Thus, we can distinguish the following methods of public debt management is the conversion, standardization, sharing bonds regression relation, rescheduling and cancellation of loans.
Conversion - this is the replacement yield loans. The state, as a rule, reduces the amount of interest to be paid on the loan. Extending the issued loans is called consolidation. Consolidation and conversion can be carried out simultaneously.
Unification loans association of several loans into one, when the bonds previously issued a number of loans exchanged for bonds of the new loan. In some cases, there may be an exchange of bonds for the regression relationship, that is, when a number of previously issued bonds equal to one of the new bonds. This method has no economic justification. Rescheduling of the loan is usually done when the issue of new loans used to service previously issued loans. All these methods are applied to domestic debt. Debt rescheduling and debt cancellation can be applied to both domestic and external debt. Debt cancellation may be due to the financial inability of the state, that is, bankruptcy, or political motives
Endnotes
- David N. Hyman (2007) Public Finance: A Contemporary Application of Theory to Policy,Cengage Learning, 09-Jul-2007
- Desmond Lachman,(2009) Budget deficits and the public debt ,International Monetary Fund 2009
- Gary R. Evans (1997) Red ink: the budget, deficit, and debt. Academic Press, 1997
- Hoster Bebi (2010)The impact of fiscal deficits and public debt. TheEconomic Policy Research Unit, 2010
- N. Gregory Mankiw (2009)Principles of Macroeconomics, Cengage Learning, 2009
- N. Gregory Mankiw (2011) Principles of Economics, Cengage Learning, 10-Feb-2011
- Robert J. Barro (2008) Macroeconomics: A Modern Approach, Cengage Learning, 2008
- Roger A. Arnold (2008) Macroeconomics, Cengage Learning, 2008
- William Jack Baumol, Alan Stuart Blinder (2010) Macroeconomics, 2010 Update: Principles and Policy, Cengage Learning, 10-Jun-2012
- William Jack Baumol, Alan Stuart Blinder (2011) Macroeconomics: Principles & Policy, Twelfth Edition, Cengage Learning, 2011
