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CHAPTER – 7 : Public Finance

UNIT-1 : Fiscal Functions: An Overview, Centre and State Finance

There are three main macroeconomic goals for any nation.

1. economic growth.
2. high levels of employment.
3. stable price levels.
• Adam Smith advocates limited govt. role
1. Defense (national)
2. Justice system
3. Public infrastructure like railway etc.
• Richard Musgrave, in his classic treatise 'The Theory of Public Finance' (1959), introduced the
three-branch taxonomy of the role of government in a market economy.

• Central govt's functions : Economic stabilization & Income redistribution

• State govt & Local govt's functions : Resources allocation

◼ Allocation Function
• Distribution of limited resources among various uses
• Determines goods and services produced in economy
• Challenge - addressing unlimited wants with limited resources

◼ Economic Efficiency
Seeks using resources optimally, minimizing wastage & inefficiency
Ensures allocation benefits each person
Private sector allocation relies on market supply, demand, prices, consumer sovereignty &
profit motive
Govt's role budgeting activities
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◼ Market Failure- it is a situation where goods are either under provided or over provided
(1) Private goods are sufficiently provided whereas public & merit goods are not provided
sufficiently
(2) Missing markets or non-existent markets is common

◼ Causes of Market Failure

Imperfect Varying degrees of monopoly power leading to low production and high
Competition prices.
Public Goods Markets fail to provide collective public goods (e.g., defense), consumed
by all.
Incomplete Markets Underproduction of merit goods (e.g., education and health care).
Resources Overuse and exhaustion of resources like the environment for self-
interest.
Externalities -ve effects caused by production/ consumption affecting third parties
Immobility Causes unemployment and inefficiency.

◼ Govt. Intervention
To connect, efficient resource allocation, social welfare
• Examples of Govt. Intervention
➢ Property rights establishment
➢ Addressing externalities
➢ Providing merit goods
➢ Controlling demerit goods
➢ Stability of market system

◼ Govt. Policy for Resource Allocation

Expense Tax policy deciding who is taxed govt. spending mix of social goods

◼ Instruments for Resource Allocation (allocation instruments)

• direct production (economic goods, e.g. electricity)
• price mechanism may be used by the govt.
• legislation like ban of single use plastic
• competition & merger policies
• regulatory activities like licensing, minimum wages etc.
• legal & administrative frameworks
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◼ Redistribution Function
• govt's intervention for fair redistribution (income & wealth)
• It is related to 'for whom' to produce in an economy

◼ Aims
• Distribution: Equitable distribution of societal output among households
• Welfare: Social welfare enhancements
• Wellbeing: Improve wellbeing of deprivation (of varied types) facing individuals
• Standard of living: Promote income, wealth & opportunities equality, security & standard of
living

◼ Example
1. Taxation policies- progressive taxation of rich & provision of subsidy to poor households
2. Proceeds from progressive taxes used for financing public services that benefit low-income
households
3. Employment reservations & preferences to protect certain segments of population
4. Unemployment benefits and transfer payments to provide support to deprived sectors
5. Families below the poverty line are provided with monetary aid and aid in kind
6. Regulation of manufacture and sale of certain products to ensure health and well-being
7. Special schemes for backward regions & for vulnerable sections

◼ Stabalisation Function
• Stability exists when economies
➢ output matches production capacity
➢ total spending matches total output
➢ labour resources fully employed
➢ inflation - low & stable

◼ Keynesian Theory
• Market economy doesn't reach full employment and price stability alone, it needs govt.
intervention
• Market tendencies cause business cycles & without govt's intervention thus will be prolonged
inflation & recession
• Tools used by govt.
➢ monetary policy, fiscal policy
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◼ Challenges
• Stagflation
• Contagion effect
• Prolonged inflation or recession
• unresolved economic disruptions caused by market fluctuation

◼ Role of Fiscal and Monetary Policy

• Fiscal Policy: eliminates fluctuation through expenditure& taxation decisions
• Govt's expenditure: injects money in economy
• Taxes: reduce disposable income & effective demand
Govt. Expenditure Taxes
Recession Increases Decreases
Inflation Decreases Increases

Budget Surplus Budget Deficient

Stimulates economic activity Slows down economic activity

◼ Conflicts
Conflicts among various goals & budgetary policy
• Effective policy designs: Balance multiple govt. objectives without jeopardizing one for the
sake of others

◼ Center and State Finance

• Fiscal Federalism: (by Richard Musgrave) division of govt. functions and financial relations
among diff levels of govt.
• Central govt's functions : Economic stabilization & Income redistribution
• State govt & Local govt's functions : Resources allocation

◼ Federal Structure
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◼ Federal Structure

In case of a conflicting legislation in concurrent list, decision of center prevails.

◼ Revenue Expenditure Allocation

• It is crucial in federation
• Distinct central & state revenue sources
• Centre and state levy taxes
• Center has greater revenue raising powers
➢ Taxes income tax, central GST, etc.
• State taxes: agriculture, electricity, mineral rights etc.
Article 268 Duties levied by the union but collected and appropriated by states.
Article 269 Taxes levied and collected by the union but assigned to the states.
Article 270 Surcharge on certain duties and taxes for purposes of the union
Taxes levied and collected by union & distributed between union and
Article 271
states as prescribed in clause 2nd States.
Article 275 Statutory Grants - in-aid from the union to certain states.
Article 282 Grants for any public purpose
Article 293 Loans for any public purpose

◼ Finance Commission (Article 280)

Facilitates transfer of resources (financial between center and state)

◼ Functions:
• Tax sharing
• Assessing finances
• Grant distribution
• Recommends President regarding financial decisions

◼ Criteria of Distribution of Center Taxes

• Income distance
• Area
• Tax & Fiscal efforts
• Population
• Demographic performance
• Forest & ecology
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◼ Fifteenth Finance Commission

• Formed November 2017
• Recommendation
➢ state receive 41% of central taxes for 2021-2026
➢ Additional 1% for newly formed UT's. Eg- J&K

◼ Introduction of GST (1 July2017)

GST Goods and Service Tax
SGST State Goods and Service Tax
IGST Integrated Goods and Service Tax
CGST Central Goods and Service Tax
• Aim – consolidated indirect taxes

◼ Supreme court verdict May 2022

• Union & state legislation has equal powers to make laws on GST, GST council
recommendations are not binding

◼ GST Compensation
• A fund was created to offset revenue losses for state
• It was implemented for 5 year but was extended for another 5 years to tide over pandemic
induced economic slow down
• CESS was limited on some luxury & demerit goods, process of which are credited to
compensation fund

◼ Expenditure Decentralization

It assigns responsibilities

Central Govt. State Govt. Local Govt.

Defense, forgein affairs etc agriculture, social, services Public utilities

Borrowing (Article 292/293)

Central Govt. • within limit set by parliament
• guarantee upon securities of consolidated funds of India
State Govt. • within limits of state legislation
• provide guarantee + obtaining center's consent in case of previous loan
Centre's Role in • within limits fixed under Article 292
State Borrowing • give guarantees in respect of loans raised by the states
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Unit – 2 : Market Failure

◼ Concept of Market Failure

• Inefficient allocation of resources in an economy
• It means the market is not functioning optimally (not that it isn't functioning at all)
• Types of Market Failure

Reasons of Market Failure

Incomplete
Market Power Externalities Public Goods
Information

1. Market Power
• It is monopoly power where Firm can profitably raise market price over its marginal cost.
• firm acts as price maker.
• Excess market powers cause one or less producer, restricting output.
• Prices higher than what would prevail under perfect competition
• Operating efficiency < Price domination
2. Externalities
• Indirect effects of an individual’s actions on others
• Operates through price mechanism, causing price change
• But if these changes do not reflect in market prices, it results in externalities.
• Other names: Spillover effect, neighborhood effects, third party effects' or side-effects

Positive Negative
(Imposing costs to Types (Conferring benefits
other parties) on another party)
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◼ Production Externalities
Negative Production externalities Positive Production externalities
Imposes external cost on others. Confers external benefit on others
No incentive to account for external cost of External factors not considered for production
decision making. decision
Uninternalized costs not reflecting in Uninternalized benefits not factorial into
product price. production choices
Eg – pollution affecting fish output, reducing Eg – individual creating attractive garden, benefits
cath for fisherman. passers-by.

◼ Consumption Externalities
Indirect affects of an individual's consumption action on others
Negative Consumption externalities Positive Consumption externalities
Produces external cost on others. Confers external benefit for others
Eg – smoking in public places causing passive Eg – immunization against contagious diseases
smoking/litter preventing others from infection.

◼ Effect of Externalities on Efficiency and Market Failure

• Money cost of production incurred by firm
Private Cost
• Eg – wages, raw materials etc
• These are not included in firm's income statement or consumer
External Costs
decisions, although they are important for society
• Total cost to society
Social Cost
• Social Cost= Private Cost + External cost

3. Public Goods
• Product enjoyed collectively one person's consumption first substance from others
consumption
• Others names: collective consumption goods, social goods
Private • Scarce goods that must be purchased for consumption
Goods • Excludable: prevent consumers to use without paying for it fixtures
Eg - cars, food, etc
Public • Consumption or social goods that can be used freely in common sense.
Goods Characteristics
• non rival in consumption (eg- parks)
• non excludable
• Indivisibility (TC same for each individual)
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◼ Market Failure in Public Goods

• Free rider problem: Tendency of individuals to benefit from public goods without contributing
to their costs
• Profit maximizing firms: Firms produce socially optimal amounts only if they change a +ve
price for it.
• Under-production: Public goods are either not produced at all or less, causing market failure.

4. Incomplete Information
• Complete information is crucial for competitive
• market and helps buyers & sellers in decision making
• Challenges - Real market
• complexity of products + services
• difficulty in gathering correct info.
• deliberate misinformation (advertisement)

◼ Asymmetric Information
• Imbalance of information b/w buyer and seller i.e. when the buyer knows more than the seller
or the seller knows more than the buyer.
Eg – second hand car market, landlords and tenants
• Asymmetric Information leads to adverse selection and moral hazard

◼ Adverse Selection (sellers knows more than buyer)

• Asymmetric information causes adverse selection, hence impacting transaction
• Health insurance companies could offer low premium
• To low risk buyers, due to asymmetrical information
• People with higher risk are preferred by insurance company.

◼ Lemon Problem (in used car markets)

◼ Adverse Selection causes Market Failure

• elimination of high quality cars
• economic agents choose sub-quality goods or leave the market
• low quality cars dominates the market

◼ Moral Hazard (buyer knows more than seller)

• It arises when economic agents shift some of its cost to others
• It takes advantage of less-informed person
Eg - Insurance market leads to increased risk taking by policy holders, causing inefficiency &
distrust.
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• Hence making governing intervention crucial to combat market failure by :

➢ legal and regulatory framework
➢ infrastructure. Eg. roads, airport etc
➢ enforcing competition
➢ consumer protection law

Government Interventions to Correct Market Failure

Merit & Correcting

Minimize Correct Equitable Public Price
Demerit Information
Market Power Externalities Distribution Goods Intervention
Goods Failure

◼ Govt. Intervention - Minimize Market Power

Indian competition act 2002 (amended in 2007) promotes and sustains market competition.
Methods
• Market liberalization (competition in monopolistic sectors Eg- telecom etc)
• Controls on merger & acquisition (to avoid market domination)
• Price capping and regulation
• Profit on rate of return regulation
• patronage to consumer association
• restriction on Monopoly powers of firm
• investigate unfair practices
• reduction in impact controls
• nationalism

◼ Moral Hazard
• It arises when economic agents shift some of its cost to others
• It takes advantage of less-informed person
Eg – Insurance market leads to increased risk taking by policy holders, cussing inefficiency and
distrust.
• Hence making governing intervention crucial to combat market failure by:
➢ legal and regulatory framework
➢ infrastructure. Eg roads, airport etc
➢ enforcing competition
➢ consumer protection law
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◼ Govt. Intervention - Correct Externalities

Towards negative externalities

Government Intervention to Correct Negative Externalities

Direct Controls Market Based Policies

• Direct control or regulation (actions on source of negative externalities) - prohibits specific

activities creating -ve externalities. Eg-
➢ Smoking banned in many places
➢ Production, use and sale of many commodities
• Market based policies -
➢ Pollution taxes
➢ Cap and trade system (limits total emission & permits tradables)
➢ Govt, schemes and mechanisms
Towards positive externalities
• Corrective subsidies to consumers and producers
• Direct govt. production: goods and services with significant +ve externalities, govt. directly
enters market as producers, Eg – Health

◼ Govt. Intervention in Public Goods

1. Some Public Goods are provided only by the government.
Examples: Defense, fire protection, Legal system Atomic Energy, Nuclear
Power Facility, Security at Airports, etc.
2. For Public Goods where Entry Fees can be charged (Excludable Public
Goods), the Government can-
Public Goods (a) Itself provide such Goods, and charge Entry Fees (which can be used to
finance the cost of providing such Goods),
(b) Grant Licenses to Private Firms to build a public good facility, and
(c) Setting Maximum Prices of Foodgrains during times of scarcity,
(d) Government Procurement and stocking of Foodgrains to stabilize
prices and Consumption.

◼ Govt. Intervention in case of Demerit Goods

• Demerit Goods - (a) are socially undesirable, (b) involve high negative externalities in their
consumption.
• Examples: Tobacco, Cigarettes, Alcohol, Intoxicating Drugs, Narcotic Substances, etc.
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• Measures are below-

1. Complete Prohibition/ban
2. Persuasion: Negative Advertising Campaigns which emphasize the dangers associated
with consumption of Demerit Goods, are launched to provide information to
Consumers, and persuade them to reduce or avoid the consumption, e.g. Cigarettes.
3. No Promotion: Govt. may prohibit the Advertising or Promotion of Demerit Goods in
whatsoever manner.
4. Time & Space Restrictions:
5. Higher Tax Rates:
6. Price Controls:

◼ Govt. Intervention
• Price flooring (minimum price)
• Ceiling price (maximum price)
Non-Market
• Minimum wages, rent controls
Pricing
• Minimum Support Price (MSP) for steady and assured income, govt.
intervenes in agriculture crop pricing
• Mandatory labeling/content disclosure
Information • Disclosure of information
failure • Public dissemination (spreading) goods
• Regulation of advertisement
• Redistribution policy (progressive income taxation)
Inequitable
• Combating block economy
Distribution
• Ensuring equity (e.g., land reforms)
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Unit – 3 : The Process Budget Making

Budget:– Budget is a powerful financial policy instrument. It involve estimated revenues and estimated
receipts of govt. during a fiscal year.
The process of making budget is referred to as budgeting and the fact is that the term 'budget' has not
been used in the Indian Constitution. Article 112 of the constitution gives Annual Financial Statement.

Types of Budget

Balanced Budget Unbalanced Budget

Exp = Revenue

Expenditure ≠ Revenue

Surplus Budget Deficit Budget

Expenditure < Revenue Expenditure > Revenue

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Budget prepared by Ministry of finance +NITI Aayog+other relevant ministries.

Budget Division Sends budget circular


Ministries, States, UT,
Asking detailed estimates of expenditure

Suggestions on Budget
 MoF
There presented in LokSabha

Budget Speech is 2 parts

Part – A Present Macro-Economic Situation, estimates of next FY, expenditure allocations for
different sectors and fresh schemes.
Part – B it includes details the progress the government has made on various developmental
measures, the direction of future policies, Govt. tax proposals
+
Annual Financial Statements (AFS)
Contingency Fund, Public accounts
+
Documents → (i) AFS
(ii) Demand for grants (DG)
(iii) Finance Bill
(iv) Statements as per FRBM Act 2003
(a) Macro Economic Framework Statement
(b) Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statements
(v) Nine other documents which are in the nature of explanatory statements
supporting the mandated documents are also presented along with the
documents mentioned above.

◼ Budget Discussions:
➢ First there is discussion on General Budget and then parliament is adjourned for a fixed period.
➢ During this period, demand for grants of various ministries are discussed by standing
committees.
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➢ After the reports on DG are submitted voting on DG takes place. In Lok Sabha.
➢ Lok Sabha can cut / reduce any demand for grants.
➢ Budget is presented in Rajya Sabha after Lok sabha.
In Rajya Sabha general discussion on Budget is done and no voting of DG
➢ After budget discussions and voting of DG, Govt. Introduce the appropriation Bill.
Appropriation Bill gives authority to govt. To make expenditure from CFI.
➢ Motions for reductions for DG are in the form of 'cut motions'
➢ After appropriation bill, Finance bill is taken up for consideration.
➢ Parliament has to pass the bill within 75 days of its introduction.
➢ Guillotine discussion on DG is put for voting only with specified time.
➢ After Loksabha Finance Bill Presented Rajya Sabha.
➢ Rajya Sabha has 14 days to return the money bill with or without recommendations.
➢ These recommendations may be accepted or rejected by LokSabha.
➢ Since 2017-18 Budget date has been advanced to 1st February.
➢ Also since 2017-18 Railway Budget was merged with General Budget.

Govt. Receipts

Revenue Receipts Capital Receipts

Revenue Non Tax Non Debt. Debt

Receipts Receipts Receipts Receipts

* Corporation Tax * Recovery of Loan * Market Loans

* Interest
* Income Tax * Dis-Investment * Short term borrowings
* Profits from PSU
* Customs Duties * External Debt.
* Surplus from RBI
* Excise Duties * State PF
* Other non tax Receipts
* GST * Other Receipts
* Receipts of UT
* Tax on UT

Schools, hospitals, transport, railways, other

economic activity generate income.

Corporation Tax = Corporate Tax It is income tax paid by companies It is collected by union Govt.

◼ Capital Receipts =  in assets

 in liability
Eg. sale of asset. Disinvestment, recovery of loans etc.
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◼ Revenue Receipt -
They neither create any liability nor reduces assets of govt.
Govt. has 2 sources of revenue receipts (i) Tax revenue, (ii) Non-Tax revenue.

◼ Revenue Expenditure Are required for

(i) Normal functioning of Govt.
(ii) Interest payment (on debt.)
(iii) Payment of grants to states |UT| others

◼ Capital Expenditure = Expenditure which result in creation of assets or reduction of liability.

Eg. Purchase of machinery, repayment of loans etc.

◼ Public Debt. Management (Debt  Loans)

➢ 2 types of govt. Debts
(i) Internal debt. (Domestic debt)
(ii) External debt.
➢ Public Debt. Management is crucial to achieve macro economic stability.
➢ Debt. Management is based on 3 pillars
(i) Low lost of borrowing
(ii) Risk Mitigation
(iii) Market development
Managed by
➢ Domestic Debt. → IDMD of RBI
Managed by
External Debt. → Dept. of Economic Affairs in MoF.
There is a PDMC under Dept. of Economic Affairs.
IDMD = Internal Debt Management Dept.
➢ Internal Debt. (from Public)
Treasury Bills → Short Term Cash Requirements of Govt.
Dated Securities → are issued to generate long term resources to finance fiscal deficit.
Ways and means Advance (WMA) → RBI Short term credit upto 3 months → State Govt.

To meet temporary mismatches in cash flow.
➢ External Debt → Loans from Asian Development Bank / International banks
 → Long term and fixed int rate
Risk is Depreciation in value of domestic currency
➢ RBI announced RBI Retail Facility on 5th Feb. 2021 to  retail participation in G-Sec. (More
investors through online access)
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◼ G-Sec. = Govt. Securities

Outcome Budget - The outcome budget is a progress card on what various ministries and
departments have done with the outlays in the previous annual budget.
Consolidated Fund of India - Money can be spent through this fund only if appropriated by the
parliament.
Contingency Fund of India - Contingency fund enables the government to meet unforeseen
expenditure and does not require prior legislative approval, unlike with the Consolidated Fund
Public Account - Under provisions of Article 266(1) of the Constitution of India, public account is
used in relation to all the fund flows where government is acting as a banker. Examples include
Provident Funds and Small Savings.

Deficit = Exp. – Income

Rev. Deficit = Rev. Exp – Rev. Income
Fiscal Deficit = Total Exp. – Total Receipts (Excluding Borrowing)
Fiscal Deficit = Rev. Exp + Cap Exp – [Rev. Receipts + Cap Receipts Excluding borrowings)
= Rev. Exp. – Rev. Receipt + Cap Exp. – Cup Receipts
= Rev. Deficit + Cap Exp. – Cap Receipt Excl Borrowing.
Fiscal deficit indicates governments borrowing requirement. It is indicated as % of GDP.
Primary Deficit = Fiscal Deficit – Interest Payment
Interest Payment means Debt Service payments.
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Unit – 4 : Fiscal Policy

◼ Objectives
• Achievements & maintenance of full employment
• Maintenance of price stability
• Acceleration of rate of economic development
• Equitable distribution of income & wealth
Fiscal policy’s ability to influence output by affecting aggregate demand makes it
potential tool for economic stabilization

◼ Types of Fiscal Policy

(i) Expansionary Fiscal Policy
(ii) Contractional Fiscal Policy

◼ Expansionary Fiscal Policy

Objective
• To increase AD
• To stimulate economy during contractionary phase of business cycle.
“Demand Deficient/recession occurs when –
(1) Falling real GDP
(2) Low aggregate demand
(3) Reduced consumer spending
(4) Rising Unemployment
Measures:
• Tax cuts – increase purchasing power – increase in AD
• Decrease in Govt. expenditure
Impact
• May lead to budget deficit because tax cut reduce govt. income and expenditure
exceeds tax revenues

◼ Contractionary Fiscal Policy

Objective
• Reduces AD
• Restrain economic activity during inflationary phase or anticipation of business cycle
expansion likely to induce inflation.
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Implemented phase
• Economy has high growth rates
• Inflation
• Asset Bubbles
Measures
• Decrease in Govt. Spending
• Increase in Taxes

(1) Govt. Expenditure

Govt. expenditure Includes
• Revenue expenditure
• Capital expenditure

(2) Taxes
Most significant revenue source for government used to establish economic stability.
During Recession After Recession
• Income tax reduction and low corporate tax • Increase tax rates reduce
• Disposable income disposable income

(3) Public Debt.

(i) Internal Debt. (Borrowed from own people)
(ii) External Debt. (Borrowed from other sources)
Public debt can be categorized in 2 broad categories
(1) Market Loans – Treasury bills, Govt. loans
(2) Small Savings – Non Negotiable, not traded
Impact
• Borrowing curtails aggregate demand
• Debt repayment inc. money available, boosting AD
(4) Budget
(1) Balanced - No net effect on AD
(2) Surplus - May have -ve effect on AD
(3) Deficit - +ve effect on AD

◼ Fiscal Policy for Long Run

Important for sustainable development
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◼ Incentive effect of fiscal policy:

• +ve supply side effects
Infrastructure Spending • happens when govt. interests in infrastructure
• provides necessary overhead for private sector
• Enhances human capital formation, physical capital
Public Goods Provision becomes more productive
• Eg – healthcare, education, etc
• can have +ve or –ve effect
Tax impacts
• depends on its encouragement for savings/investment
• Rewards innovation & entrepreneurship
Well Designed Tax
• Does not discourage incentives
Policies
• Promote private investment in business
• Tax & spending policies corrects market failure
Market Failure
• environment taxes (cost of firm, output)
Correction
• Subsidies - boost output

◼ Fiscal Policy for Reduction in Inequalities of Income and Wealth

• Progressive Direct Tax System: greater ability to pay higher taxes, tax burden is equally
distributed
• Differential Indirect Tax System: luxury goods taxes and necessities taxed
• Planned Expenditure: redirects income from rich to poor through target spending
programs.
Eg. poverty - alleviation program

◼ Challenges
• Progressive Tax- shouldn't discourage work, savings & investment
• Redistribution Policy - shouldn't be generous enough to reduce incentives to work and
save

◼ Limitations of Fiscal Policy

Types of Lags in Fiscal Policies:
• lag in recognizing need for policy change due to complex
Recognition lag
economic variable & data collection challenge
Decision lag • lag in evaluating alternative policies
Implementation lag • bureaucratic delays in enacting & implementation
Impact lag • outcomes are not visible for a time
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• Bad Timing: Poorly timed changes in fiscal policy, due to lags, can cause initiation of
expansionary policy at the time of economy recovery
• Policy change: Instant policy change not possible
• Expenditure: like defense & on going capital projects are hard to alter
• Disincentives: Supply side economists concern over certain fiscal measures causing
disincentives
• Inflation: Deficit financing purchasing power of people. (leads to inflation/price
spiraling)
• Govt. borrowings: creates a burden on future generations as debt
• If govt. borrowing to compete with private sector, cause rise in interest rates, reduced
private sector investment, etc.

◼ Crowding Out (here fiscal policy becomes ineffective)

Increased govt. spending can replace private spending, diminishing the effectiveness of
expansionary fiscal policy
Fiscal Policy • if govt. spending substitutes private spending, it reduces impact on AD
effects
Ineffective • govt's deficit spending during recession leads to borrowing, rising
Fiscal Policy interest rates and crowding out private investors
Growth • crowding out weakens long term economic growth prospects by
implication reduced private sector investment
• deep recessions may limit crowding out as investments (private sector)
Exception
are already low, allowing govt. borrowing without rise in interest rates