6 - The politics and economics of budget deficit control: policy questions and research questions

Summary

An important area where political and economic considerations intersect involves government fiscal policy. Most economists feel that government budget deficits reduce national saving, which in turn reduces the longterm capital intensity of an economy and its standard of living. Hence, controlling budget deficits is one way, perhaps the best way, for present generations to protect the economic interests of future generations. At the same time, to control budget deficits politicians must vote for either tax increases or spending reductions, both of which are politically unpopular and increase politicians' chances of being voted out of office. Hence, the deficit control issue sets up an immediate tension between the policies that might be necessary for long-term economic expansion and the votes that might be necessary for political survival.

Given this tension, one might ask why real-world governments would ever balance their budgets. Part of the answer is that there are natural economic costs to letting budget deficits get out of control. If governments try to finance deficits by printing money, inflation will rise. If governments try to finance deficits by borrowing, interest costs will rise and, indeed, beyond some level, borrowers will not hold the government securities at any interest rate.