December 11, 2011

Fiscal and Debt Policies of the Government

Governments use budgets to plan, control and record their fiscal affairs.

In a budget the expenditure of the govermment is shown and its revenues from its taxation policy are shown. There can be budget surpluses or budget deficts or balanced budgets.

When the government incurs a budget deficit it can borrow from central bank or borrow from public to pay its bills.

Governments are using fiscal policy to moderate business cycles and maintain economic growth.

if government has surplus budget, private businesses can use all the savings in economy and invest in busineses. If government runs deficit budget, it has to borrow from public and this will reduce the savings available for investment for private businesses. This is the crowding out argument.

Knol - 223



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