Fiscal sustainability is essential in economic growth of a country through reducing the level of government borrowing. This enables government to use their savings to foster economic development whereby the government is able to focus more on the economic empowerment of the country through infrastructural development and creation of a favorable environment for local and international investments. Increased government revenues aids in increasing resources that are necessary for the economic activities Resources include the availability of natural resources and the skilled labor required to produce goods and services from the available natural resources. As such, economic growth occurs when there are adequate resources necessary to produce goods and services.
Fiscal sustainability also increases the level of local and foreign private investment which is a key factor to promoting economic development of a country. Increased investment influences economic growth through promoting technological development which enables the society to come up with easier ways of producing goods and services out of the resources they have. Secondly, investment fosters increase in capital per worker. This is involves creation of more jobs which increases physical capital per worker and also enable the workers gain more expertise in the production of goods and services hence resulting to increased physical capital per worker.
Economic growth is affected by fiscal policies that increase government spending. Increased borrowing by the government to finance their total spending may result in budget deficit leading to increase in real interest rates in the country (Hall and Lieberman, 198)). This as a result leads to crowding out of private investors and as a result discourages investments leading to a decrease in GDP. The level of interest rates is the key determinant on the interest of foreign and local businesses’ willingness to invest in the country. Increased interest rates leads to a reduced rate of returns on investments leading to the private companies reducing their level of investments while low interest rates on private borrowing indicates a higher returns on investment and therefore low interest rates attracts more investors contributing to economic growth of a country.
Failure to balance the government budget is likely to increase government borrowing year after year leading to budget deficit. Prolonged budget lowers the supply of loanable funds and as the government borrowings to cater for the budget deficits of the country, demand for the credit shifting to the right (Hall and Lieberman, 229). The shift results to increase in the country’s interest rate as the equilibrium shift to the right which is a higher interest rate. In addition, prolonged budget deficit leads to inflation as the aggregate demand curve for credits shifts to the inflationary region in the aggregate supply for credit.
Economic development is a sensitive factor that is affected by the fiscal policies that determine the level of government borrowing. Ability of the government to regulate the level of borrowing through stabilization of budget is essential tool of economic development by ensuring a balanced or low interests rates resulting from increase in the supply of loanable funds of the country. This as a result encourages the level of investment in a country hence leading to advanced technology which is essential in efficient production of goods and services resulting to improved Gross Domestic Product. It is therefore essential for the government to come up with fiscal policies that regulates budget spending with the aim of reducing borrowing as way encouraging investment opportunities which promotes utilization of available resources in the production of goods and services resulting to economic growth and development.
Hall, Robert & Lieberman, Marc. Macroeconomics: Principles and Applications: Principles and Applications. NY: Cengage Learning, 2009.