Fiscal Deficit-Need and Implications
Is FD good or bad?
Fiscal deficit is bridged by market borrowings and central bank printing fresh currency (monetization). To a limited extent, FD is important as the Government’s ability to help growth and welfare increases. Government can always return the loans when its revenues improve due to tax buoyancy. However, FD becomes problematic and even destabilizing when it overshoots a rational threshold.
Large deficits, even if they do not spill over into macroeconomic instability in the short run, will require higher taxes in the long term to cover the heavy burden of internal debt. It means the inter-generational parity is hurt if debt mounts as future generations will have to pay higher taxes to help the government repay the debt.
The implications of fiscal deficit are as follows:
Case: Grexit
Greece government borrowed recklessly and was not exercising discipline in tax collection and spending. In 2009 December, Greece's credit rating was downgraded by one of world's three leading rating agencies amid fears the government could default on its ballooning debt.
In the year 2007, Greece debt as a percentage of GDP was near 100%. By the year 2014, it hit 175%. This explains the reckless borrowings done by the Greece government.