Macroeconomics Asynchronous assignment

- Devansh Rajdev 21111620

Should the government should balance its budget?

Pro - The government's budget should be balanced. Future generations of taxpayers will be
burdened by the government's debt, which will force them to choose between paying more taxes,
cutting government spending, or doing both. The bill for current spending is passed on to future
taxpayers by current taxpayers. Furthermore, a deficit has the macroeconomic consequence of
reducing national savings by making public savings negative. As a result, interest rates rise, capital
investment falls, productivity and real wages fall, and future output and income fall. Deficits boost
future taxes and lower future incomes as a result. During wars and recessions, however, a budget
deficit is justified.

Con - The government's budget should not be balanced. The government debt crisis is overblown.
When compared to predicted lifetime earnings of $1 000 000, the national debt of $1130 per
individual is insignificant. It is not always beneficial to reduce government spending. Reducing the
fiscal deficit by cutting education spending, for example, may not benefit the wellbeing of future
generations. Other government measures, such as welfare benefits, redistribute income across
generations. People who want to reverse the intergenerational income redistribution caused by
budget deficits simply need to save more during their lifetime (thanks to lower taxes) and leave
bequests to their children to cover the higher taxes. Finally, government debt can expand
indefinitely without increasing as a percentage of GDP.

Should the tax laws should be reformed to encourage saving?

Pro - To encourage saving, tax regulations should be changed. The standard of living of a country is
determined by its productive capacity, which is determined by how much it saves and invests.
Because people respond to incentives, the government could encourage (or dissuade) saving by: -
lowering taxes on the return on saving (interest income).
- cutting means-tested government programmes like welfare, old-age pensions, and youth
allowance. These advantages are currently lowered for people who have saved prudently, creating a
disincentive to save.
Some types of retirement savings are already eligible for tax breaks. Households may have more
opportunities to use tax-advantaged savings accounts.
Consumption taxes, such as the GST, encourage people to save more than income taxes.

Con - To encourage saving, tax laws should not be changed. One of the goals of taxation is to
distribute the burden of taxation fairly. By lowering saving taxes, all of the aforementioned solutions
will boost the incentive to save. Because high-income people save more than low-income people,
the tax burden on the poor will rise. Furthermore, saving may not be sensitive to changes in the rate
of return on saving, thus lowering saving taxes will only benefit the wealthy. This is due to the fact
that a greater rate of return on savings has both a substitution and an income effect. As consumers
substitute saving for current consumption, an increase in the return to saving will increase saving.
The income impact, on the other hand, shows that an increase in the return to saving reduces the
amount saved.