What are the implications of a municipality overspending their allocated budget
The municipality is the local government body of a small area of the country. This area can be described as the city or district to separate it from the next municipality. The people of the district must elect the officers who work there.
When a municipality overspends its budget, it will accumulate debt that will have to be repaid in the future. The deficit could result from needs-based spending where the municipality needed to fund development projects for its constituents urgently. This may be unavoidable, and thus the deficit should be undertaken to fund projects for municipality projects such as sanitation or education.
However, the municipality may also be undertaking frivolous spending especially close to an election, to become more politically popular than their opponents and gain votes. This can be problematic as the fund is limited, and there could have been better uses for the limited money in the budget.
The deficit that has been accumulated must be repaid in the future periods; one way of doing this is the municipality decided to raise taxes on its citizens to cover the debt. This will have a negative impact on the consumption and investment components of aggregate demand as the citizens now have lower disposable income.
The overspending by the municipality can also cause a crowding-out effect. The public sector's increased spending can reduce the avenues available for the private sector to undertake investment activity. This can be detrimental to the long term growth of the economy.
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