How does Fiscal deficit affect a country's Economy?



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Dear Mr. Binny Mathews I was going through the Indian Budget of 2013-2014 and know very well about all the technical terminologies of an economy per say, but thinking in a broad perspective 'How does a country's fiscal deficit affect its economy and in terms of GDP since Fiscal and Current account deficit are always measured as the percentage of the GDP?' How is the deficit and the GDP related in a detailed perspective as in terms of affecting a country's economy? It would help if you please give the example of what happened in Greece as they are taking austerity measures to bring down the deficit and get the country's economy back within the line.
Thank You!

2 Answer(s)


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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.

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.

Please also refer to the below video
http://www.youtube.com/watch?v=BO_JXFZhdsQ&playnext=1&list=PL6B9F06FDA24E5636&feature=results_video

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Thank You very much!!!