If the governments Expenses are more than Revenue then a Fiscal Deficit occurs. To fund the fiscal deficit the government needs to borrow money. The interest expense on the new debt inturn increases the fiscal deficit for the next year. Higher the fiscal deficit (as a % of GDP) worser it is for the economy since the economy is running on debt.
Mar 05 2013 10:14 PM
Running on debt is fine as long as debt is at a safe level and GDP is high enough to cover interest payments. In cases of Greece uncontrolled spending by the government and low productivity (due to large public welfare schemes) resulted in a toxic combination of high debt and not enough GDP to pay the interest expense and hence the current austerity measures.
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