Advantages and Disadvantages of Government Borrowing Money

Advantages and Disadvantages of Government Borrowing Money are listed and explained in this article for your perusal.

Effects of Government borrowing

Advantages and Disadvantages of Government Borrowing Money
Advantages and Disadvantages of Government Borrowing – Photo Source:

The system of government borrowing money has both negative and also positive effects if it is effectively utilized by the government of that country.

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Some governments borrow to finance an investment plan that will yield a profit over some time, particularly in the long run and conversely some government borrows to spend on liabilities which may act as an economic burden on that nation. Briefly, this article will list and explain the advantages and disadvantages of government borrowing.

Advantages of Government borrowing

1. To finance the budget deficit

When a government predicts the balance of Payment and then delivers that it is experiencing a budget deficit, one of the ways to balance it or finance the budget is to borrow money probably from its sister nation or other financial bodies.

The purpose of the budget financed will depend on the yield or the returns that the nation will receive either in the short run or in a long run.

2. To finance huge capital projects

Money can be borrowed by the government to ensure that various capital projects are financed. Some of these capital projects when financed can have a high return on the economy of that nation.

3. To meet the cost of national emergencies

Government can engage in borrowing to ensure that it is to meet the cost of national and an unexpected or usually dangerous situation that calls for immediate action such as war, drought, famine, hurricane, etc.

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4. To degrade the economic burden on taxpayers

Government can decide to degrade the economic burden on taxpayers by borrowing money to execute suggested projects. Revenues are raised for the government mainly through tax.

When government levies tax burdens on taxpayers, it leads to an increase in the prices of goods and services especially when the effect of the tax is pushed from the taxpayers to the consumers.

To reduce this economic burden, the government can simply borrow money to degrade the burden on taxpayers.

5. To meet the balance of payment disequilibrium

Balance of payment when adjusted can be in a state of disequilibrium. When the expenditure of the government is beyond the revenue, the government could decide to meet the balance of payment disequilibrium by way of borrowing money from other countries, especially developed countries.

6. Government can borrow money to enable it to correct or execute the balance of the payment deficit.

Aspect from the fact that money can be borrowed to finance the budget, it can also be borrowed to enable the government to correct the payment deficit.

There are extreme cases where the government borrows money from foreign aid and foreign bodies to pay salaries and correct the balance of payment deficit to avoid such an economy from falling.

7. To provide employment opportunities

It is important to know that some government borrowings are not only monetary gains but can be used to equally establish broad projects.

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When these projects are established, there are capable of generating employment opportunities for millions of people.

For example, if the government borrows money to build an industry or other capital projects, it can intend to employ thousands and millions of people and intend to reduce the crime rate of society through these employment platforms.

Disadvantages of Government borrowing

8. It leads to Inflation

Inflation is the persistent rise in the price of goods and services and to a non-economist, it is simplified when much money is chasing or pursuing a few goods, therefore, causing the supplier to increase the price for the highest dealer. During the period of inflation, government expenditure exceeds government revenue.

This is because the government spends (or borrows more money) more to maintain projects and services. Since there is little money in circulation to generate revenue, government borrowing continues and the inflationary gap becomes large.

9. Unemployment

Any effort by the government to resist unemployment usually intensifies government borrowings especially when the economy does not have enough money, it runs into debt.

10. Poverty

A borrowing nation can be classified as a poor or under-developing nation. Borrowing by the nation is an indication that the government of that nation does not have enough capital base.

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Despite the government, borrowing is used to control fluctuations in national income which conversely leads to a rise in national debt as well.

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