Reducing fiscal deficits
Arguably, containing fiscal deficits in an economy is very crucial. As a matter of fact, reducing fiscal deficits is very important for both economic growth and stability. In most occasions, successive governments have found it very difficult to contain fiscal deficits when it arises. A fiscal deficit refers to the state whereby a nation is spending more than its income or revenue. Logically, there are two crucial fiscal policies that are used in order to reduce fiscal deficits. These include cutting of public expenditure or increasing revenue through taxation. In most liberalized nations government is not in a position to increase revenue; hence, the best way that has a crucial impact in reducing fiscal deficits is through the public expenditure. It is worth noting that the best way to reduce the fiscal deficits in a country depends greatly on the prevailing situation. Evaluation of the use of public expenditure rather than taxes to reduce fiscal deficits gives more insights on its effectiveness.
Cutting public expenditure is very crucial in reducing the fiscal deficits in an economy. In order for government to spend it must have resources to spend which may entail, borrowing. Cutting public expenditure will reduce fiscal deficits by reducing government borrowing, as well as helping the public sector debt. Perhaps, cutting of public expenditure is very efficient in ensuring that the fiscal deficit burden is reduced. In an economy, the public spending should be carried out efficiently to prevent further fiscal deficits. Reduction of wasteful government expenditure is important as compared to increasing taxes, especially in the event of reducing fiscal deficits. It is worth noting that resources in an economy are very scarce; hence, they must be used effectively. In many, economies one of the main cause of high fiscal deficits is the wasteful public spending.
Undeniably, it does not make sense to increase taxes and wastefully spend them. The economy will be at its worse if the government receives a lot of revenue from tax, and spends it more wastefully. In the modern economies, studies have shown that cutting public expenditure is more effective as compared to increasing taxes in the process of reducing fiscal deficits. During fiscal deficits, cutting of public expenditure has the potential to stabilize the economy. Cutting of public expenditure has far much reaching impacts has compared to increasing taxes.
Based on the effects of multiplier in an economy, it is important that note that public spending is more effective in changing the fiscal deficit as compared to taxation. A small cut of public spending causes a much bigger improvement in the economy as compared to the change in taxation. Therefore, cutting a small percentage of public expenditure will have a greater impact on the fiscal deficit. Hence, it makes much sense to use public spending in reducing fiscal deficit rather than increasing taxes.
Cutting public spending on things such as consultancy, military expense, and public sector salaries is one of the consumption from the government. These tends improve the economy much easier than increasing taxation, especially in the mid-term. The main aim of cutting public spending is to reduce the fiscal deficit. Increasing taxes had a more impact in increasing the burden to the taxpayers; since it is political there are many loopholes that may take place, which may worsen the current state of the economy. Taxing the public will basically increase revenue and reduce fiscal deficit, but there is no guarantee that the taxes will be used effectively. Evaluation of cutting public expenditure and increasing taxes in order to reduce fiscal spending is very critical. It is evident that both the increase of taxes and decrease of public expenditure are effective in reducing fiscal deficit. The impacts vary depending on the state of the economy.