There have been an increased number of debates trying to justify whether public debts which emerge as the result of deficit spending by many governments are the pillars of economic growth and development or economic derailing initiatives adopted by these governments. Recently most governments especially those from developing nations greatly seem to be adopting this due to the inefficiency and ineffectiveness of their tax system which is unable to support both their existing and proposed flagship projects which are significant measures of economic growth and development. Basing on the Keynesian view, economic development and growth is best achieved through deficit spending which is basically operation of governments based on debts in addition to their national revenues. With the existence of these contradicting views on the efficiency and effectiveness of public debt, different economies have exhibited different characteristics with regards to whether public debt is of importance or is a derailing element in their respective economies.
Summary
According to Ugo Panizza and Andrea F. Presbitero, (2014) adoption of fiscal policies which mainly extend towards public debt in a situation commonly referred to as deficit spending does not have a specific outcomes of specific economies across the all global economies. This is means that public debt may have varying repercussions on various economies in both the long run as well as their short run. However, according to the study using Bayesian approach, it is clear that there are integral factors which are set up the governments in recession periods that greatly determine the success of public debts the government acquire at whichever interest rates charged. In addition to that, these particular policies upon incorporation by the governments such as those of government that having multiple equilibrium may demand those respective governments set up restrictive fiscal policies that aim at the reduction of the immediate changes of investors sentiments that may facilitate to the worsening of the equilibrium level of the economy. Therefore worsening of the equilibrium can be greatly caused by investors shying away from venturing investment opportunities that greatly help stabilize the economy through increased income levels and provision of employment opportunities in the economy. An example of such policies is the one that determines the interest rates in the economy (Panizza, " Presbitero, 2014). High-interest rates offered by governments discourage investments while low-interest rates do not only encourage investments but also improve the countries capital formation due to the attraction of foreign investment.
According to the author, these particular policies lead to the reduced growth and development levels despite the existence of high public funds as a result of a country operating at deficit spending initiatives. In the most occasions, these particular paradigms and policies are established at the recession in an environment comprised of contrasting views on the best ways to invest the already available funds as a result of the government borrowing (Panizza, " Presbitero, 2014). In addition to that, the level of countries debtless does not have implication on the desired growth levels given the fact that a country has well established paradigms policies that are desired to restore the country back during the recession periods of the economy. Therefore the authors’ advocates for limited application and adoption of restrictive policies during crisis periods since most of these policies hurt and provide limited rational decisions by various stakeholders which may end up worsening the economy instead of restoring it despite the availability of borrowed funds to facilitate this process.
Discussion
From these authors augment the articles widely touches on various aspects of the economy especially the deficit spending aspects of most countries with aims of development and growth. For any economy to be termed and perceived as at equilibrium, numerous factors have to be well established especially an efficient and elaborate tax system that is able to provide adequate resources for government spending (Bernardini, " Peersman, 2018). The article basically disqualifies classical economists’ notions that government intervention in the restoration of the economies equilibrium worsens the entire stability of the economy than correcting it. Government invention through adaptability of the deficit spending initiatives as per the articles seems to either improve the condition or worsen the condition depending on the nature of its policies to help proper implementation of policies at recession.
There are numerous advantages that a country is accrued to upon implementation of the deficit spending initiatives as compared to increased taxation efforts to help either in the recession period or in its aim to both develop and grow (Qazizada, " Stockhammer, 2015). Proper utilization of resources from borrowing is one of the advantages of this initiative whereby the country establishes appropriate investment proposal and projects that enables it to pay back the debt. In addition to that are growth and development as a result of the reliability of the funds as well as the adequacy compared to the tax system. The reliability of these funds greatly helps in the development of projects that are integral in the determination of the level of economic growth and development. However, there also exist disadvantages of deficit spending by the government in order to economically develop (Qazizada, " Stockhammer, 2015). The increased costs which are transferred to the common citizens through payment of high taxes to cater for the high-interest rates is one of the negative effects of overreliance on borrowing. In addition to the "crowding out effect" with the national economy may be experienced whereby as the government gets access to a lot of finance through borrowing, the government charges high interest rests in the economy which generally implies that private investor shies away from investing in that particular country.
Conclusion
Government intervention in the restoration of the economy back to its stability as well as in fostering economic growth and development does not have fixed implications on whether it worsens that situation as a classical economist have argued or improve the condition as Keynesian perspective eludes. However, the applicability of different restrictive policies upon adoption of the deficit spending initiatives by the government which is a form of government intervention determines the successfulness or failure of a country. Countries ought to limit themselves from the establishment of policies during a crisis upon the government intervention through applicability of deficit spending which is mostly informed of borrowing both locally and internationally.
References
Bernardini, M., " Peersman, G. (2018). Private Debt Overhang and The Government Spending Multiplier: Evidence for the United States. Journal of Applied Econometrics, 33(4), 485-508.
Panizza, U., " Presbitero, A. F. (2014). Public debt and Economic Growth: is there a causal effect?. Journal of Macroeconomics, 41, 21-41.
Qazizada, W., " Stockhammer, E. (2015). Government Spending Multipliers in Contraction and Expansion. International Review of Applied Economics, 29(2), 238-258.
