Ways a government can finance a deficit or utilise a surplus

Question 1

Ways to finance a deficit:

Answer 1

1. Borrow from RBA
2. Borrow from Australian public
3. Borrow from overseas (sell bonds)

Question 2

Crowding out

Answer 2

Restricts the ability of the Australian public to borrow as they are giving / borrowing money to the public

• Federal government financing deficit by borrowing domestically
• Increases demand for credit / borrowed money
• Puts upwards pressure on credit (cost of money)
• Less access to funds for private sector finance C/I
• Interest rates rise

Question 3

Utilising a surplus

Answer 3

Budget surpluses can be used to pay off budget debt, decrease tax rates which should boost AD, and start up new programs such as expanding healthcare.