BALANCED BUDGET MULTIPLIER

1. The Balanced Budget Multiplier may be defined as the ratio of the change in the
equilibrium level of output to a change in government spending, where the change
in government spending is set-off by a change in taxes, so that no deficit is created.
2. It is a measure of the change in aggregate production caused by equal changes in
government purchases and taxes.
3. It is one when estimated income is equal to estimated expenditure, i.e., the amount
of tax is equal to the amount of expenditure in the form of government spending.
This kind of budget leads to increase in the aggregate demand and brings financial
stability.
4. The balanced budget multiplier has a value equal to 1 – indicating proportionate
changes.
5. Balanced Budget Multiplier = Tax Multiplier + Govt (expenditure) Multipler

PUBLIC DEBT AND CROWDING OUT OF PRIVATE INVESTMENTS

1. Crowding-Out Effect is an economic theory arguing that rising public sector spending
drives down or even eliminates private sector spending.
2. Sometimes, the government adopts an expansionary fiscal policy stance and
increases its spending to boost economic activity. This in turn leads to an increase in
interest rates on (private) borrowings.
3. Increased interest rates thus negatively affects private investment decisions and a
high magnitude of the crowding out effect may even lead to lesser overall income in
the economy.
4. In a modern economy which is operating significantly below capacity, can actually
increase demand by generating employment, thereby stimulating private spending
as well. This process is often referred to as “crowding in”.
5. Crowding-In Effect, thus, suggests that government borrowing can actually increase
the aggregate demand of the economy and hence promote the private sector.