Inevitability of Budget Deficit in a Growing Economy

Abstract

Using a simple macroeconomic model and a model with microeconomic foundations about behavior of consumers and firms, we examine the budget deficit in a growing economy, and will show mainly the following results. 1) If the initial savings is positive (or investment of private firms is not large), we need budget deficit including interest payments on government bonds to maintain full employment with or without inflation. 2) If the initial savings is negative (or investment of private firms is large), investment of private firms cannot be financed only by consumers’ investment, but also by the government. 3) If the interest rate on the government bonds is larger than the growth rate, the budget surplus excluding interest payments is necessary to maintain full employment under constant prices.