All government investments and spending has to be raised in order to finance its operations. The government might acquire this income through two major ways, borrowing to finance deficit spending and raising taxes. However, borrowing to finance deficit spending might not be as effective as increasing taxes because of various reasons. The ways through which financing deficit is achieved, such as; issuance of government debt to overseas investors can however deteriorate the country’s economy. The government might be forced to offer higher interest rates in order to attract buyers of the debt because of the risen level of budget deficits (United States, 2004). Taxes would eventually increase in the future, while spending by numerous households and the private sector businesses would be squeezed. The scenario presented by borrowing to finance deficit spending is contrary to increasing taxes since the raised taxes result in increased revenue that is used to run both federal and public programs. This increases government spending.
Acquiring of debts every year results in an elevated level of government borrowing, this leads to accumulated national debt. This means that the government would be forced to spend more on the payment of accumulated debt-interests to government bond and other security holders. The payment is inclusive of an opportunity costs and transfer of income, which could have been used on other productive ways such as in the healthcare sector (United States, 2004). Increasing taxes in this scenario is more effective because the government is not subjected to extra expenses such as repaying loans.
Finally, high levels of government spending have a negative effect on the growth of the private sector in the economy of the country. This is because the high levels of debts by state sectors raise distribution of GDP (United States, 2004). The scale of waste in this scenario is higher in the public sector. Money spent in unproductive ways would have been used to develop the country’s economy. Increasing taxes would not result in wasteful spending because the acquired revenue is spent according to the outlaid plan, which involves benefits for the whole nation because of the increased government spending.
United States. (2004). Federal debt: Answers to frequently asked questions : an update. Washington, D.C.: U.S. Government Accountability Office.