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(Macroeconomic)-Based on your opinion, how a strong economy affects the size of the budget deficit.



Based on my opinion, in the case of Malaysia, there are many different kinds of economic effects budget deficit such as:

 

1)      Increased Debt


Increased debt is one of the consequences of a budget deficit. When the government spends more than it collects, it is expected to bear these costs. It would be financed by interest unless it has accrued funds from the previous year's surpluses. Importantly, governments borrow funds from private investors by selling bonds. In other words, the government obtains funds from the private sector, insurance and pension funds, individuals, banks, and foreign investors.

 

When the country has a budget deficit, it owes an increasing amount to banks and pension funds. As a result, they'll have to request more funding to keep the deficit going. The more money the government borrows, the less money is available for private institutions. Since the government has already received billions in funds, banks and other financial institutions have less money to lend. As a result, governments are forced to pay higher interest rates, potentially increasing debt evermore.

 



2)      Higher interest rates


As the government borrows more money, the private sector loses money. At a 1% interest rate, for example, only 100 individuals would be able to lend the government money. If the government needs to collect more funds, it must find more potential lenders. This is accomplished by the amount of interest they are able to pay. For example, if the threshold is raised to 2%, there could be twice as many individuals able to lend to the government.

 

As a result, the longer the government runs a deficit, the more it has to spend. The more it borrows, the more it would have to pay in interest. The more interest it needs to pay, the more debt it accumulates. As a consequence, persistent budget deficits will lead to higher levels of debt.

 



3)      Crowding out effect


Budget deficits are also followed by high debt ratios, as economies fail to collect enough funds to finance their expenses. This attracts investment in government bonds and other forms of denominated debt. On the other hand, this takes investment and loans away from private institutions and towards the government instead. As a result, small and medium businesses find it more difficult to secure the same amount of credit that they might obtain.

 



4)      Fund public sector investment


To fund infrastructure spending, a government can run a budget deficit. This could entail the construction of new highways and bridges, as well as more accommodation and better telecommunications. This public-sector spending has the potential to boost the long-term productive capability and accelerate economic development. If the economy improves, the borrowing can be repaid. For instance, many public-sector spending programs will yield a higher rate of return than the cost of borrowing.

 

5)      Increased aggregate demand (AD)


A budget deficit entails reduced taxes and increased government spending (G), which would raise AD and potentially lead to higher actual GDP and inflation.




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