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Economics

Home > Economics > Economic policies and management > Methods of financing the deficit and use of a surplus

Exercise 1

1. Outline the main form of deficit financing used by the Commonwealth Government.
   
   The main form of deficit financing used by the Commonwealth Government is borrowing from the domestic private sector by selling treasury bonds.
   
   
2. Evaluate the effect of borrowing money from overseas on the economy.
   
   When using this form of deficit financing, the Reserve Bank sells new CGS to overseas buyers. The foreign funds received are then converted into Australian dollars. Under a floating exchange rate, overseas borrowing has no effect on the domestic money supply. However, exchange rates and domestic interest rates can be affected.
   
   The government has not borrowed from overseas since the late 1980s because this form of borrowing adds to foreign debt. Interest has to be paid on the securities, which increases the net income component of the balance of payments as well as the current account deficit. Alternatively, the government may decide to borrow funds from overseas to reduce the crowding out effect.

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