The fiscal deficit gives the borrowings requirement of the government. Explain.

Asked on by antimjain

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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This statement is not technically true, but it is true if a government is going to be prudent.

A fiscal deficit is the difference between what a government spends and what it takes in in revenues.  When a government spends more than it takes in, the most responsible thing to do is to borrow the difference.  If the government does this, then the fiscal deficit is the amount that the government needs to borrow so that its revenues, added to what it borrrows, will equal what it spends.

However, it is possible for a government to simply create more money (print it, for example) and use that to fill the deficit.  The problem is that this is very irresponsible, particularly if the deficit is large.  Doing so will lead to inflation and a lack of public confidence in the currency.

Basically, then, if a government spends more than it "earns" it has to borrow to make up the difference.

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