Answer to Question #130741 in Macroeconomics for Letlhogonolo

Question

Describe three ways in which government spending can be financed.

Answer 1

Government spending can be financed through various ways, three of this ways are discussed below:

1.      Taxation.

Tax is a major component in government financing. Taxes ensures that the government has enough resources to run it’s activities. Since taxes are applied differently to different groups of people e.g those with a higher income are taxed more as compared to those with low levels of income ,this is achieved as the government has tax brackets and classes for the various groups, this is carried out by governments in order to redistribute wealth in the country and thereby reducing inequality and marginalization of less developed regions. Therefore the government meets it’s administration and expenditure functions through the taxes acquired from the citizenry.

2.      Government Borrowing.  

Usually governments have budget deficits, and they can be covered through borrowing either internally or internationally. Government debt can either be owed at the national level or by the local government. The government can finance it’s activities by i.e giving bonds and  t-bills which are considered as securities for future consideration by the holder. They can also borrow directly from commercial banks or other international institutions like the International Monetary fund or the World Bank. All this actions help the government finance it’s activities.

3.      Printing Money.

Under dire conditions the government might be forced to print money to finance it’s activities. Though if the whole process is not controlled it may lead to inflation in a country where there will be few goods chasing more money. In case of situations like the Global financial crisis when banks lost a lot of money, then the government can come in through their central banks and then print money to have the economy running again. Though this is  considered as a last resort. So, this is also a way in which the government can finance it’s expenditure.