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Treasury Bills: The Relationship of T-Bills and Fiscal Policy

Treasury bills are an important outlet for governments and an excellent way for them to acquire funds without raising taxes. While there are risks to issuing treasury bills and borrowing money, these risks can usually be lessened through proper investment management and fiscal policy decisions.

Treasury bills, Fiscal Policy

A government that wants to provide goods and services to its people but doesn’t have the available tax revenue to fund that expenditure can turn to the capital markets to borrow the money it needs. It does so primarily by issuing securities such as treasury bills. A government’s fiscal policy is how it regulates the way it operates in global economic markets.

All levels of government will borrow money at some point. Treasury bills are obligations compelling the government to repay the borrowed amount at maturity and also to pay interest in the form of coupons at specific points in time.

Risks of Too Much Borrowing

If a country borrows too much money, it has to pay a great deal of interest every year in order to service that debt. That’s money that could have been used to pay for program spending instead. By borrowing money, the government has placed a greater emphasis on spending in the present than in the future. It has discounted the value of future expenditure.

Fiscal Policy

Depending on how much money the citizens of a country or province save out of their own incomes, the borrowing government must sell its obligations to foreigners by issuing treasury bills.

By doing so, the government makes itself vulnerable to the shifting and often volatile sentiment of the international capital markets. If it has a sufficiently large external debt in relation to its GDP (as an indicator of its current and future capacity to repay), speculators might attack the country’s currency or bond markets, forcing interest rates higher and causing the value of that country’s economy to degrade in international terms.

What is Fiscal Policy?

Indeed, an excessive debt policy can lead to a vicious cycle of speculative attacks, followed by higher and higher interest payments that can cause an economic slowdown.

In such cases, a country may find that just when a stimulating policy is required to help the economy struggle back to its normal growth trajectory, its government is crippled by high interest rates and poor liquidity. Nobody else will lend the government money with which it can stimulate the economy under anything but the most onerous terms.

It may, on the other hand, be prudent to borrow during economic downturns in order to stimulate the economy with the intention of repaying those funds (and thereby dampening the economy) in times of economic growth.

Governments and Fiscal Policy

In a democratic system, there are two ways to organize a government: a unitary system and a federal system. In a federal system, both the federal and provincial governments conduct fiscal policy in different capacities. However, different levels of government can find ways of participating in areas outside of their purview. In the past, the federal government has given funds to the provinces targeting their spending on education in the form of grants to subsidize university education.

Treasury bills are an important outlet for governments and an excellent way for them to acquire funds without raising taxes. While there are risks to issuing treasury bills and borrowing money, these risks can usually be lessened through proper investment management and fiscal policy decisions.

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