What must a government do if it has a fiscal deficit?

A government with a fiscal deficit occurs when its expenditures surpass its revenues, necessitating action to bridge the gap. Borrowing funds to cover the shortfall is a common and effective method for governments facing a fiscal deficit. When a government borrows, it typically issues bonds or takes loans, allowing them to maintain spending in the short term without raising immediate revenue. This approach can help sustain public services and investments that might otherwise be compromised due to budget constraints.

Additionally, borrowing can be a strategic choice, especially if the loans are at low interest rates or if the funds are used for investments that promote economic growth, potentially leading to higher future revenues. It is important to balance this option with the understanding that excessive borrowing can lead to higher debt levels, which may have long-term implications for fiscal policy and economic stability.

In contrast, reducing public services, increasing taxes, or boosting subsidies would each have different impacts on the economy and public welfare, but they may not directly address the immediate need to cover a budget shortfall as borrowing does.