Budget deficits are an economic reality that most countries face. When a government’s spending exceeds its revenues, it must find ways to close the gap. The two main methods are debt financing or money printing. However, these solutions have profound and often harmful consequences for the economy, including inflation, currency devaluation, and a decline in purchasing power.
When governments choose to finance their deficits by issuing debt, they borrow money on financial markets. In the short term, this allows government spending to be maintained without immediately raising taxes. However, this debt must be repaid with interest, which increases the financial burden on future generations. By accumulating debt, governments can see their borrowing costs rise if investors perceive a greater risk of default. High levels of government debt can also lead to currency devaluation as investor confidence declines. This leads to higher interest rates, making debt servicing even more expensive and diverting resources from productive investment.
The other method is to print money, a solution often favoured in acute crisis situations. However, this strategy generally leads to increased inflation. Increasing the money supply without a corresponding increase in the production of goods and services devalues the national currency. Inflation erodes the purchasing power of consumers, thereby reducing aggregate demand. People see their savings lose value, which particularly affects fixed incomes and low-income households. In the long run, uncontrolled inflation can lead to a loss of confidence in the currency, leading to more severe economic crises.
Ideally, a budget deficit could be used to finance infrastructure investments, which would stimulate economic growth and job creation. Projects such as building roads, bridges, and power grids have a multiplier effect on the economy, increasing productivity and facilitating trade.
Unfortunately, in many cases, budget deficits are used to finance current consumption rather than productive investment. Consumption spending, such as subsidies and welfare payments, while important, does not generate long-term returns on investment. This leads to an increase in debt without improving the productive capacity of the economy.
When borrowed or printed funds are spent without creating tangible economic value, this results in a loss of capital. Resources are used for immediate expenditures, without creating the infrastructure needed to support sustainable growth. In the long run, this approach is unsustainable and can lead to severe economic crises.
The combination of high debt and inflation can lead to a downward spiral that is difficult to control. Governments must cope with rising debt servicing costs, continued currency devaluation, and persistent erosion of purchasing power. This limits the state’s ability to invest in long-term projects and meet the needs of its population.
To avoid such a disaster, governments must adopt prudent fiscal policies, aiming to balance their budgets as much as possible and to use deficits strategically to finance productive investments. Fiscal transparency, reducing waste and ensuring value for money are essential to maintaining long-term economic health.
It is crucial that nations aim for a zero budget deficit to avoid debt accumulation and prevent future devaluations. A continued budget deficit inevitably leads to a growing debt burden and economic instability. Pursuing a balanced budget helps maintain investor confidence and economic stability.
However, it is unfortunate to note that deficit spending is often used for electoral purposes to artificially stimulate the economy and win votes. Excessive spending during elections creates a false impression of prosperity in the short term, but it has serious consequences in the long run. This practice underlines the need for a separation between politics and economics to avoid such ethical slippages.
Governments should restructure to eliminate deficits and reserve the use of budget deficits for financing the economy and infrastructure, especially in times of recession, as economist John Maynard Keynes suggested. He advocated using budget deficits to counteract economic contraction cycles and stimulate aggregate demand in times of slowdown. Unfortunately, politicians have often misinterpreted and deviated from this initial objective.
Instead of focusing on productive investments, they have used budget deficits for personal power or enrichment, thus fueling unsustainable consumption and increasing public debts. This deviation from Keynesian principles leads to a long-term loss of capital and compromises economic stability.
The case of Lebanon is a poignant example of the dangers of poor budget deficit management. With public debt reaching 150% of GDP, Lebanon was faced with a deficit financing shortfall, which required the printing of money and led to runaway inflation. This situation caused an economic and financial catastrophe, leading to the collapse of all bank deposits, regardless of the currency.
The Lebanese crisis, still unresolved after five years, is exacerbated by the lack of political and economic reforms. Politicians have refused to sacrifice their personal interests and implement necessary reforms, preferring to maintain their practices of project commissions and overcharging. As a result, the country has seen its GDP fall by half and 80% of bank deposits have disappeared, leading to massive impoverishment of the population.
This dramatic situation should serve as a warning to other nations, including Western states, where budget deficits continue to grow. If public debts reach dangerous levels similar to those in Lebanon, systemic risks for currencies and banks will increase significantly, threatening overall economic stability.
The budget deficit is a double-edged sword. When mismanaged, it can lead to runaway inflation, currency devaluation, and a decline in purchasing power. However, if it is used to finance productive investments, it can stimulate economic growth and create jobs. The political and economic choices made today will determine the economic health of nations in the future. It is therefore crucial to manage deficits prudently and over the long term, aiming for a zero deficit to ensure economic stability and avoid electoral temptations that can lead to harmful excesses. States must restructure and use budget deficits only for strategic investments, especially in times of recession, in accordance with Keynesian principles. The case of Lebanon should serve as an example of the potential dangers of poor budget management and the urgency of adopting responsible economic policies to prevent similar crises elsewhere in the world.
Bernard Raymond JABRE
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Budget deficits are an economic reality that most countries face. When a government’s spending exceeds its revenues, it must find ways to close the gap. The two main methods are debt financing or money printing. However, these solutions have profound and often harmful consequences for…
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