Is govt dept affects consumption of citizen ?
Author: Preeti Khatri, May 4, 2018 – Posted in: Accounting, Banking & Finance, Economics – Tags:

is govt dept affects consumption of citizen

When the government cuts down the taxation rate then it faces budget deficit (expenditure over the revenue ); which is financed by borrowings from RBI. Then in future the government has to repay the loan to RBI . For this government will raise tax in future. Thus today fall in taxes will lead to rise tax in future; So we can conclude government debt is equivalent to future taxes.

Now the question is – will this process effect the citizens of the country and their consumption?
The answer is No; because consumers are forward looking; they know that tax cut today will lead to rise in the tax rate in future; thus the money today they have saved will be used to pay taxes in future hence consumption remain unchanged.

But it is not true for those people who have binding constraint because for them current income is more important than future because bank loans are not available to them; so they will consume today whatever amount they saves from the reduction in taxes thus there future consumption will be low but it was an exceptional case.

Overall we can say that reduction in taxes leads to tax rise in future ” Ricardian Equivalence “; thus consumption doesn’t get affected because people are more concern about their permanent income not on their temporary income.

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