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Feb 10, 2012

How to check Fiscal Crisis?

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A fiscal crisis is generally related to the excessive growth of public expenditure. However, the size of public expenditure is not the root cause of a fiscal crisis, it is the manner of financing public expenditure that is more important.

A fiscal crisis means that the government is unable to finance its expenditure out of its income, either because it made commitments to supply public goods and services far beyond its means, or because it is unable to make people pay for the public goods and services either through taxation or through user cost.

To check fiscal crisis, governments often resort to excessive borrowing from both domestic and external sectors, but if the borrowing is excessive and beyond the norms of debt financing it may eventually lead to inflation and reduction in income, lower the amounts of public goods and services and increase unemployment, which together may lead to social and economic discontent in the economy.


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