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Methods for Financing a Budget Deficit

Economics (Year 12) - Fiscal Policy

Christian Bien

Borrow from Overseas

Borrowing money from overseas is the main way the Australian Government finances a deficit. This is because it allows Australia to access low-interest rates as well as large amounts of capital from high saving countries. The only downside is that it can accumulate large amounts of public-owned foreign debt. This will result in outflows of interest repayments to foreign residents.

Selling Government Bonds Domestically

The Australian government can sell government bonds to domestic investors. Government bonds are an IOU and grants the owner the promise to be paid periodic interest repayments by the Government. Issuing too many government bonds can result in unsustainable interest repayments.

Quantitative Easing (Printing more money)

The Reserve Bank can print more money to reduce the real value of government debt and make it easier to pay off. However, this is very risky as it will contribute to inflation and even hyperinflation if used inappropriately, seen evidently in Zimbabwe. Quantitative easing can be used in recessionary periods as it can be used as a last resort to increase inflation and avoid the risk of deflation.

Selling Government Assets

The Australian Government can privatise Government Business Enterprises (GBEs) in return for money to finance a government deficit. Australia, however, only has a limited stock of assets before eventually the government will be limited to what GBEs it can privatise. Selling government businesses also foregoes any future profits that could be made but do have the opportunity to receive future company tax revenue. Some examples of privatised businesses include the Commonwealth Bank, Qantas, Telstra and Medibank Private.

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