Understanding the Effects of Fiscal Deficits on an Economy

Downside of Deficits
On the other hand, government budget deficits have been attacked by numerous economic thinkers throughout time for their role in crowding out private borrowing, distorting interest rates, propping up non-competitive firms, and expanding the influence of nonmarket actors.
Nevertheless, fiscal deficits have remained popular among government economists ever since Keynes legitimized them in the 1930s.
So-called expansionary fiscal policy not only forms the basis of Keynesian anti-recession techniques. It also provides an economic justification for what elected representatives are naturally inclined to do: spend money with reduced short-term consequences.
Keynes originally called for deficits to be run during recessions and for budget shortfalls to be corrected once the economy recovered. This rarely occurs, since raising taxes and cutting government programs is rarely popular even in times of plenty. The tendency has been for governments to run deficits year after year, resulting in massive public debt.
What Does Deficit Mean?
Deficit refers to the budget gap that occurs when, for instance, the U.S. government spends more money than it receives in revenue. It's sometimes confused with the national debt, which is the debt the country owes as a result of government borrowing.
Why Does the U.S. Keep Running Deficits?
The U.S. government continues to spend more than it gets in revenue because by doing so, government representatives can continue to offer services and expand public programs that voters want. By increasing spending, it avoids raising taxes to get the money, which is unpopular with voters.
What Effect Does a Deficit Have on the Economy?
Opinions vary. Some feel that government spending revives and drives economic activity and growth. Others disagree and believe deficits created by excess spending impede private borrowing, spur inflation, and lead to higher taxes needed to pay off the debt that results from that spending.