Question

i. Explain each method of raising funds for the deficit ii. Dicuss the advantages of each methods of raising funds for a deficit iii. Dicuss the disadvantages of each mehod of rasing funds for a deficit.

When there is a Budget Deficit, the government must borrow to finance the difference.

Conversely, when there is a Budget Surplus, they save and pay off past debt.

Budget Deficits have an Expansionary Effect? §

A Budget Deficit causes a Net Injection of funds into the economy, if the Planned Govenrment Spending was 450b, then the planned net injection resulting from the difference is worth 50b injected. Even if the Budget Deficit Falls from one year to the next, the effect is still expansionary, for example;

• Year 1 - Deficit of k=2.5$
  • Real GDP will increase by $50b since mutliplier ()
• Year 2 - Deficit of k = 2.5$
  • Real GDP will also increase by () $25b

Methods to Finance a Deficit (Boarba) §

• Selling new Government Bonds
• “Borrowing” from the RBA (Central Bank)
• Borrowing from Overseas (Foreign Debt)
• Selling Government Assets

Commonwealth Government Securities / Bonds §

Commonwealth Government Securities, (CGS) / Bonds, can be sold by the government to finance a deficit. CGS / Bonds are responsible for 95% of the government’s borrowing requirement.

• Bonds raise funds for their issuer, in return for a rate of interest to the buyer.
• Bonds are guarranteed by the government, and thus, are very popular with instituitonal and private investment
• Bonds are purchasable by both Domestic and Foreign, Residents.
  • Foreign Residents purchasing bonds is not “Borrowing from overseas”
• 45% of Bonds are owned by foreign businesses
• In 2022, $892b worth of CGS is issued by the government.

Advantages §

• Selling bonds to domestic residents does not affect the money supply in the long-run.
  • This is because a leakage occurs at the time of borrowing, but then it is reinjcted into the econonomy since government only borrows when it has a deficit.
  • So in the long-run, once the government spends the borrowed funds the effect effect on the money supply is nil.

Disadvantages §

• When the government issues bonds it competes in the Financial Market, leading to Crowding Out out of Private Investment as their outcompeted by bonds that are comparatively cheaper.

Printing Money (The RBA) §

• The government can borrow from the RBA
• “Printing money” from the RBA directly increases the money supply.

Advantages §

• Will have the desired “Expansioanry effect” on the ecnonomy

Disadvantages §

• Increases inflationary pressure.

The RBA is also independant, and thus can, if it decides that it would od harrm, not fund the government’s deficit. -#econs-example The RBA has said that they will not fund the current government’s deficit.

Borrowing from Overseas §

Foreign Residents can buy bonds too.

Foreigners buying bonds is the same thing as “Borrowing from Overseas”

Advantages §

• This is when the govenrment takes on Foreign Debt, directly borrowing from foreign banks.
• This would result in a direct inflow of money capital.
• Does not result in Crowding Out.
• Generate Income remittances in the Balance of Payments ---> Ongoing det repayments for future generations pushing the Burden of Borrowing onto future generations as they must repay this debt.

Disadvantages §

• causing an appreciation in the Exchange Rate.
• Adds to Foreign Debt / ”public debt”
  • This causes greater leakages than injections in the long-run though as we have to pay it back through Income Remittances which could have a signficiant Opportunity Cost.

Sell Public Assets §

• Government can “privatise” some of their assets, likke government business enterprises, or government propery, land, and/or buildings.
• This is not used often because it can compromise the level of public services.

Government Debt §

• in 2022-23 the government net debt was $572b.
• The annual interest payments equals $13.6b. If governments use this borrowing to grow the economy, through higher levels of economic activity, and increased spending on infrastructure, then it is beneficial to take on debt to finance these things in the long run.

Impact of a Surplus §

What the government can do with a surplus §

• The government can pay off government debt built up by past deficits
• The money can be kept to pay for deficits in the future.
• Returned to taxpaers, e.g. as a direct payment, or tax cut

#econs-example

Australia had zero public debt in the mid-2000s, thus they;

• Returned some to tax payers
• Keeped some for future deficits