Q. Which of the following statements are correct regarding the impact of the increasing fiscal deficit?
1.It leads to increased debt-to-GDP ratio.
2.It can lead to an increase in household savings.
3.It crowds out the private sector investment from the economy.
Select the correct answer using the codes given below:
Explanation –
Statements 1 and 3 are correct. A fiscal deficit occurs when a government’s expenditures exceed its revenues, necessitating borrowing to cover the gap. This borrowing increases the national debt. As the debt increases while GDP remains constant or grows at a slower rate, the debt-to-GDP ratio rises. Crowding out occurs when government borrowing drives up interest rates, making it more expensive for the private sector to borrow and invest. This is a common concern with high fiscal deficits, as increased government borrowing can compete with the private sector for available funds, potentially leading to higher interest rates and reduced private investment.
Statement 2 is incorrect. An increasing fiscal deficit does not lead to an increase in household savings. It can have the opposite effect. Higher borrowing costs due to increased government borrowing can reduce disposable income and thus decrease household savings.
Source: The Hindu
