The sustainability of budget deficits

Abstract

The aim of this research is to analyze the budget deficit sustainability and by doing so determine whether the government can use it to reduce the negative consequences without compromising the overall balance. In the recent decades, some developed countries have been facing extremely high budget deficits, which attracts great attention of economists. The risk of default is hanging like the Sword of Damocles above the heads of some EU members and everyone agrees that the increase in public debt is unsustainable. State budgets begin to resemble a Ponzi scheme - let usjust mention the US federal deficit. This is also a central issue for the EMU, because debt cannot continue to grow faster than the national income. Over time, an increasing part of the budget has been dedicated to debt servicing, until finally its amount does not force the authorities to finance debt either by printing money or by defaulting. This paper points out that solutions are possible if the executive state authorities abandon the unreasonable spending and the neo-liberal concept of managing the economy. But without compelling changes of the country's economic policy, the risk will reach the point where the adverse effects become inevitable.