Deficit, Debt and Political Theory of Government Debt Essay

Deficit, Debt and Political Theory of Government Debt - Essay Example Those who support this theory base it on the following two assumptions: 1. A budget constraint for the government does not mean that the government will have a deficit forever. A tax reduction or increase in expenditure that leads to spending being higher than revenues means that the deficit will have to be financed through a future tax increase or decrease. 2. The second assumption assumes that consumers are rational and will not increase consumption due to a debt financed tax cut. Their being rational means that they will reduce their consumption, because they understand the government’s fiscal policies that the increase in government spending finance through debt, will lead to higher taxes in future. The above assumptions imply that lower taxes and higher government expenditure through increased debt will not affect the economy as a whole (Alesina & Guido, 1990). There are those economists who are against the Ricardian equivalence and argue that a budget deficit can be extr emely dangerous for an economy. According to Ricardians, lower taxes today means higher taxes tomorrow. The opponents see the timing of the expected future tax increase to trickle up to a future generation.... More debt for the government leads to a higher budget deficit (Barro, 1974). Budget Deficit and Public Debt Public debt or government debt is the amount a government owes. A government needs money to finance its expenses. It finances through borrowing from the public by issuing treasury bills or bonds and borrowing from corporations, individuals and foreign governments. The public debt is the outstanding amount borrowed in the past but has not yet been repaid. The size of the public debt is determined by the cumulative amount of borrowing that the government has done. Budget deficit is the excess spending the government has incurred over its income. When the total expenses are subtracted from all income and there is a shortfall, this is known as a budget deficit. The government has spent more money than they can earn. When the income is more than the expenditure this is known as a surplus. The link between budget deficit and public debt is that when a government has a budget deficit it has to get money to finance the deficit and it does this by borrowing which leads to accumulation of more debt. The magnitude of the debt is measured by the debt to GDP ratio (Barro, 1979). Foreign investors will be interested in the debt to GDP ratio, as this clearly indicates the financial position of the economy. A foreign investor will invest in a country that can pay its debt and where the economy is growing. Factors determining an Explosive dynamic Debt to GDP Ratio Public debt increases due to excessive borrowing by the government from issuing treasury bills or bonds and borrowing from foreign governments, individuals and state corporations. GDP is the Gross Domestic Product of an economy and it is the total income from individuals, corporations and the government. Debts are

Importance of Financial Accounting of Government Affairs in World and Research Paper

Importance of Financial Accounting of Government Affairs in World and More Specifically in Africa - Research Paper Example Government accounting is the process that encompasses recording, analysis, classification, summary, communication, and interpretation of financial information about government conduct in financial domain in aggregate. It is detailed reflection of transactions and other economic events involving the receipt, payments, spending, transfer, usability and disposition of assets and liabilities (International Federation of Accountants, 2000). 1.2 Purpose of Government Accounting: Government disclosure in accounting provides citizen evidence and reasoning for the raising of funds from public and donors and domains where the said amount is made useful with its cost and benefits information also exportable from such statements. Government accounting is also an important source of information for national and international investors about how the economy is being run based on internal revenues, local or international debts. Information disclosed in government accounting statements are fulfillme nt of â€Å"their right to know† about the government strategy regarding the accounting and finance of the country (GASB 2006, p. 5). Government accounting, concisely, is required to serve the following three purposes based on their priority (Chan, 2003): BASIC PURPOSE: Basic purpose of government accounting is to prevent and detect public treasury from corruption and graft. Citing report by the International Monetary Fund (IMF) and the International Development Association, Thomas (2001, p. 38) mentioned that countries with heavy debt and poor state of economic stability 'lack the practices and procedures necessary for budgeting, monitoring, and reporting on the use of public resources'. INTERMEDIATE PURPOSE: Intermediate purpose of government accounting is to ensure the robust and thorough financial management of public resources through budget planning and presenting actual activities. ADVANCE PURPOSE: The advance purpose of government accounting is to help government ensu re its accountability to public. To achieve this purpose it is required to have efficiency on three levels; accountability of the bureaucracy to the chief executive, of the executive to the legislature, and of the government to the people. Transparency in government accounts serves to ensure efficiency in economy and a weapon against government theft and frauds. Accounting information can be used to monitor and enforce the terms of economic, social and political contracts; when government conduct any market transaction its information from financial statements can be used for economic accounting of government. Similarly, when government levies any tax to finance its budgetary needs, details regarding its need and benefit can be assessed for political accounting of government (Chan, 2003).Hence, accounting for government is more for accountability as it involves public resources. Acknowledgment of the importance of government