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Running head: IMPACT OF BUDGET DEFICIT ON RISK MANAGEMENT FOR ORGANIZATIONS 1

IMPACT OF BUDGET DEFICIT ON RISK MANAGEMENT FOR ORGANIZATIONS 10

Impact of budget deficits on risk management for organizations

4/4/2019

Impact of budget deficit on risk management for organizations

Government and organization operations are run on a scheduled budget. However, in some cases, the expenditure might exceed the income. This causes a deficit and might drive a given organization to acquire debt in order to run its operations. It is claimed that since the1970s the United States federal government has been registering a deficit between its expenditure and the revenue. In cases, whether the government runs in deficit, most operations will be affected as they will receive limited funding or no funding. Additionally, the government might incur debts in an attempt to run these operations. Currently, the United States federal government is argued to have incurred deficits over the last few years. It is estimated that in the next ten years if proper measures are not put in place to address the issue, the federal government will be running at a deficit of more than $ 5 trillion according to Alichi et al. (2019). In one instance the federal government incurred a deficit of more than $1 trillion in only four years between 2009 and 2012. Such deficits are projected to hurt the economy of any country adversely. The budget deficit is known to affect the savings of the country which is majorly attributed to the fact that most citizens will have less funds to save due to the economic imbalances.

The government often addresses all the deficits through various strategies. One of the significant ways employed by most government is through the sale of government securities. Securities such as treasury bonds are often sold to individuals or organizations, who will, in turn, lend a loan to the government with a promise of future repayment. While the budget deficits affect the government at large, risk management for federal agencies will be significantly affected. As the government tries to address the issue of budget deficit, organizations which are dependent on the government for funding can be severely affected. The organizations might receive limited funds from the government which in turn hurt their planning and operations.

The primary impact of the budget deficit is that the risk management for federal agencies will receive fewer funds from the federal government. As the deficits grow, the federal government will look for strategies to reduce it. Therefore, one of the primary ways is to cut on the government expenditure which often includes finances to the federally funded agencies. As the agencies receive fewer finances, their operations are significantly affected. This is because; basically, all the operations require enough funding for them to run effectively.

In order for the agencies to devise and mitigate their risks, they would need adequate finances, which the source is the federal government (Bovaird, & Löffler, 2015). One of the most important aspects of organizations is to be able to plan their future objectives. Planning, therefore, is dependent on the ability for the organization to access the risks that the organization might encounter in the future and device ways to mitigate them. Risk management operations for every organization requires funds for elements which include, treatment strategies, funds for reducing the identified risk or incident and third-party accreditation. All these necessary agency resources require funds to ensure their completion. In these cases, organizations often have their own budget, including risk management. Usually the federal organization budge on their activities depending on the funds they project to receive from the government or those they already received.

Therefore, when agencies are not able to finance their risk management, their operations are limited. Inadequate finances often result in scarce resources. Especially in the current generation where there is a need for continuous innovation, the agencies might require sophisticated technology in order to conduct a risk analysis. However, such technology might be costly which can either compel the agencies to borrow loans if the government does not adequately fund them. On top of this, if budget deficits are incurred for a long time, such federal agencies might not be able to pay their workers. In the long run, the agencies might b forced to lay off their workers.

Furthermore, in some cases, the government offers services to these agencies such as research, education, and training among others. Such services often bolster the actives of these agencies by ensuring that they utilize effective procedures and approaches when implementing their risk management. However, when the government is incurring budget deficits, it might fail to provide these services to the agencies. When reducing the operations in order to mitigate the budget deficit, the government might cut funds on such activities since they might be considered to be less critical (Bovaird, & Löffler, 2015).

Additionally, it is argued that budget deficits result in the unpredictability of the future economy of the country. One of the ways in which agencies manage their operations is when they are able to access the possible risks and ensure that they curb or utilize them. Therefore, in such cases where the economy is unpredictable, the agencies might fail to run their operations effectively. For example, as earlier noted, the risk management operations majorly depend on their ability to predict the future outcomes. However, in this case, they might not be able to predict them. In cases where the budget deficits result in inflation, it affects the government funded agencies.

When inflation occurs, it consequently increases the cost of doing business. In cases where inflation occurs without the agencies being prepared financially, it might result in adverse impacts such as inadequate finances. When the cost of businesses increases, the agencies often ask money from the government and since the government is also affected the agencies will not be able to fund their risk management process. Therefore, since most agencies are dependent on their future expectations from the business economy, in cases of unpredictability, they might incur an unforeseen additional cost which might hinder their activities including risk management. On top of this in cases of inflation, the organizations might be compelled to seek loans from other agencies or banks. Loans often result in an interest rate, as the loan takes time to repay the interests rates increases. Therefore, this might cause a long-term effect on the organization operates as they will be working on the loan repayment.

Moreover, as noted by Molocwa, Khamfula, & Cheteni (2019), the current government budget deficit can cause the government to prioritize on activities while ignoring or limiting the funds for other activities. The government often borrows loan from other countries or agencies in order to enable them to run the necessary operations. However, in cases where the loan repayment takes longer time than anticipated, the focus of the government will shift to paying the debts. When this shift occurs, most agencies funded by the government might receive limited funds. As the funds decrease, the agencies will not be able to plan their activities effectively. In some cases, the agencies lay off their employees or close down some of their operations due to limited funds from the government.

In an attempt to mitigate this effect; some agencies often borrow loans from banks. In cases where the companies borrow loans and take time to pay, they incur large interest rates. In this case, this might lead to a fall in the organizations bond ratings. This indicates that the companies will have to bear higher interest’s rates for them to be given a loan. If this trend continues, some of the agencies might be closed down because of a lack of operational finances.

The budget also affects the planning and operation of nonprofit organizations. While the federally funded agencies are directly affected by the budget deficit, the nonprofit organizations are indirectly affected. The budget deficits affect the economy of the country by increasing the rate of tax, inflations, increase in interest’s rates among others (Bernardini, & Peersman, 2018). The increase in taxes is often an attempt for the government to increase the revenues that will allow them to pay for the debts incurred. The inflations and weakening of the economy are due to the weakening of the currency as the government prints more money in an attempt to address the deficit. On the other hand, nonprofit organizations often depend on grants and donations. Their budget depends on the funds they receive from the donors. However, as the economy weakens the donors will often reduce their funds. The reduction in funds, therefore, hinders the organizations' operations as well as risk management. The organization will depend on risk management procedures when planning for their future activities. However, when these operations are not funded, the organization might fail to project their activities. This will, in turn, affect the activities, as the organization might be operating with limited plans.

On the other hand, the budget deficit can be argued that it has positively impacted the risk management for the agencies. Some of the federally funded agencies are currently not entirely dependent on the federal funds. The agencies that are dependent on the government to support their operation have been affected by the budget deficits. When the government is able to finance the agencies adequately, they are able to make forecasts and projection for their future operations. However, due to the unpredictability of the economy, most agencies make risk management procedures which are flexible. The risk management procedures are devised in that they are able to adapt to any given situation. Due to the persistence of the budget deficit every year, some of the organizations have devised ways in which they are prepared for it in their risk management assessment and planning.

Therefore, the budget deficits have compelled the organizations to stay active and alert by designing the strategies that will help them negotiate such difficulties. For example, some federal agencies have devised ways in which they can earn revenue in order to finance its operations. The risk management departments have been advised to devise strategies which can be employed in cases where they receive limited funds from the government. Some of these agencies have engaged in other operations which help them to earn revenue. For example, some nonprofit organizations have been found to be engaging in other businesses apart from their charity activities. These businesses help the organization to raise funds that would boost its operations as well as in projecting their future activities.

The organizations have made investments in various sectors in the government including banks. Therefore, in cases where the government has limited resources to fund the operations of such organizations, will just use their investments to fiancés most of their activities. This is often done in the form of loans; the company borrows a loan from one of their sectors. The acquisition of a loan from one of the segments in the organization is more comfortable and cost-effective compared to borrowing loans from other organizations such as banks (Batkovskiy, 2015). The revenue gained from the other investments will help the organizations in planning for their future plans. The planning and the operations of the organizations will therefore, not be hindered unlike when they depended on the government funds. Due to the uncertainties posed by the government funding as a result of the budget deficit, the companies can plan, for their future activities with assurance of the funds from their sources if the funding from the government fails.

Additionally, the budget deficit has helped companies to stay active and agile. It is argued that some of the organizations have included the effects of budget deficits in their risk management procedures. The government budget deficit affects the economy of the country. Consequently, the cost of business operation is deemed to rise significantly causing the organizations to incur an additional charge. In response to such a case, the risk management of most federally funded agencies has included the effects of the budget deficit when analyzing possible risks. Such effects as inflations and the lower economy as well as the weakening of the currency have been included in the risk management of the various organizations. The organizations have managed to stay alert in case of such effects. This has helped the organizations to formulate responses to mitigate and curb the budget deficit from enormously hurting their operations (O'connor, 2017).

The budget deficit has also boosted the decision-making strategies of the organizations. Due to the unpredictability aspects of the economy, most organizations have resorted in resolving issues as they arise. Some of the organizations might not be able to predict the risks that the organization might incur in the future. Therefore, the companies have ensured that they have proper and efficient decision-making procedures which provide that they respond to the issues adequately. Therefore, it could be argued that the organizations have formulated the strategies that help them respond to the problems as they occur. The efficiency of the decision making of the risk management in an organization can be easily applied to other sections of the organization like maintenance, planning as well as operation. Therefore, this in turn boosts the company’s revenue.

In conclusion, the budget deficits incurred by the government has a considerable impact on various sectors. The United States is deemed to have suffered a budget deficit since the year 1970. The deficit affects not only the public but also government-funded organizations. The organization risk management is abundantly affected. Risk management is considered to be an

integral part of an organization as it bolsters its planning and operations. However, deficits mean that such organization activities are not adequately funded.

The government often cuts its spending in response to the budget deficit. As the government reduces the expenditure, it will provide limited funding to the federal agencies which in turn have to limit their operations. The risk management of such companies suffers the most as they might not be able to plan the future since the operations require funding. On top of this, the organizations might also be forced to reduce their spending. This results in limiting some of their activities which might include laying off some of the staff members.

Equally the company might not be able to update their technology. Technology has currently become vital in organizational decision making. Some of the activities include accessing the potential risks that the organization might encounter. The use of computers or technologies requires high maintenance and regular update in order to stay relevant. However, when an organization receives inadequate funds, the organizations might not be able to carry out its activities effectively. While the budget deficit has hurt the organizations, it has also positively impacted the organizations. Some organizations have ensured that their risk management strategies include expecting the budget deficit in the cause of operations. Some of the organizations have included their risk management procedures to address the effects of the budget deficit such as inflation.

Additionally, organizations have improved their decision-making strategies. Due to the unpredictability of the economy, the most organization anticipates the adverse effects. In this case, the organization opts to solve such issue effectively as they arise. These ensure that the decision making of the organization is efficient in order to provide that the case is adequately addressed. As the decision making is improved in the risk management, other organization operations are also bolstered as the procedures could be applied to other organization activities.

References

Alichi, A., Avetisyan, H., Laxton, M. D., Mkhatrishvili, S., Nurbekyan, A., Torosyan, L., & Wang, H. (2019). Multivariate Filter Estimation of Potential Output for the United States: An Extension with Labor Market Hysteresis. International Monetary Fund.

Batkovskiy, A. M., Konovalova, A. V., Semenova, E. G., Trofimets, V. Y., & Fomina, A. V. (2015). Risks of development and implementation of innovative projects. Mediterranean Journal of Social Sciences, 6(4), 243.

Bernardini, M., & Peersman, G. (2018). Private debt overhang and the government spending multiplier: Evidence for the United States. Journal of Applied Econometrics, 33(4), 485-508.

Bovaird, T., & Löffler, E. (Eds.). (2015). Public management and governance. Routledge.

Molocwa, G. A., Khamfula, Y., & Cheteni, P. (2019). BuDGET DEFICITS, INVESTMENT AND ECONOMIC GROWTH: A PANEL COINTEGRATION APPROACH.

O'connor, J. (2017). The fiscal crisis of the state. Routledge.