Please analyze the effect of the economy on the government’s budget and identify

Question

Please analyze the effect of the economy on the government’s budget and identify the impact of the government’s budget on the economy in 2 or 3 paragraph. Thank you!

Question B aie 200, Gresce's ational ebr ha gro othe sie ofits conmy that lenders had lost confidence in the Greek government's capacity to service it. Fear of a Greek default led to contagion - Spain, Italy, Portugal, and Ireland were all subject to the disapproving glare of frightened lenders. The crisis caused seismic disruption in Europe and the rest of the world. The International Monetary Fund, the European Commission, and the European Central Bank reluctantly offered Greece bail-out loans- but with strings attached. In order to get the money, Greece had to agree to austerity measures. In this context, austerity means tight fiscal policy - that is, higher taxes and/or lower government spending in order to shrink Greece's annual budget deficit.

Explanation / Answer

Observing the example of Greece we can analyse that government affects the economy and is affected by it. The way government can influence the economy includes the expansionary and contractionary fiscal policy discretionary in nature. This includes taxes transfers and government is spending which act as a tool to depress or stimulate aggregate spending. These tools are highly sensitive to the government budget deficit and if the government is very insecure about its deficit, it may run a balanced budget or an austerity budget.

Many times the state of the economy also affects the nature of the budget that the government will run. Many nations have experienced Financial debt and other macro economic crisis that have led to the demise of their macroeconomic equilibrium. Many of these Nations have defaulted on there debt and had surrendered to the IMF condition of insolvency. What IMF suggest to a nation in Crisis is to reduce it's spending and increase austerity measures to tight the fiscal policy and to shrink the annual deficit in the budget. This is a very difficult task to do because government can influence the aggregate demand only by it's spending by reducing its taxes and both are not allowed in austerity budget

So we see that the government can influence the economy and the same economy can also influence the budget pattern of the government. In this sense it becomes necessary for the government not to indulge in excessive debt which can lead to a financial crisis or a budget crisis such as The Greece crisis.

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