Sample Economic Essay on Unraveling the US Budget Deficit

Unraveling the US Budget Deficit

Fiscal deficit is realized when the government spending exceeds its revenue in a given budget year. Each year, the deficit adds to the accumulated government debts as the government funds the extra spending from either the loan from the public or the loan by itself. Public loans are normally generated from the foreign government and investors through issuance of bonds and treasury notes. The government loan by itself means that the debt is owed to other different federal agencies such as the Social Security Trust. What is the trend in the US Fiscal deficit and how does it affect the economic life of an ordinary American? This article evaluates the US budget deficit, its causes and the concerns of common Americans.

According to the Congressional Budget Office (CBO), a non-partisan body that advises the Congress on budget matters, the US deficit has been shrinking over the recent years (CBO www.cbo.gov). In 2009, when the country was recovering from the 2008-2009 depression, budget deficit accounted for about 10% of the federal budget. This has dropped gradually, with each year recording a slightly lower deficit than the preceding year. By 2013, for example, the deficit stood at 4.1% of the total Gross Domestic Product (GDP). Currently, CBO approximates that the fiscal deficit in 2014 could be as low as 2.8% of the GDP (CBO www.cbo.gov). Reduction in budget deficit sounds like a reprieve to the common American. However, the downward trend is not expected to go beyond 2016 unless the current economic policies are changed. With the projected rates of unemployment, CBO argues that the US fiscal deficit may rise again, and could exceed 4 % of the GDP by 2022.

Despite the downward trend in fiscal deficit, the US citizens have been concerned about the federal budget planning. This is partly because it concerns their economic status and the CBO had predicted a decade of budget surplus in 2001. According to CBO’s projection, US would have enjoyed a cumulative surplus of $5.6 in the period 2002-2011. This, instead, turned out to be a cumulative deficit of $6.1 trillion. This proceeding left American investors worried about the US economies unpredictability (Taylor 197)

Why did the CBO projection fail to be realized? In their attempt to explain the cause of the US fiscal deficit and the failure of the CBO’s prediction, several scholars have blamed it on the congress and the US executive (Taylor 190). However, some of the major causes of the deficit could not be controlled directly by the government. For example, the crash of the Great Recession of 2008, whose cause dates back in the history of the US, has been highlighted as a major cause of the deficit. In its prediction in early 2000s, CBO did not accurately foresee the 2008 recession.

Although the US government is not entirely to blame for the CBO prediction’s failure, some changes in policies during both Bush and Obama’s administrations contributed to the deficit (Taylor 195). For example, President George W. Bush instigated tax cut policies, which are still prevalent in Obama’s administration. President Obama has also launched an economic stimulus package that extends unemployment benefits while reducing on the tax basket. There has also been an increase in the outflow, including spending such as on the military and health care, which increased substantially over the past ten years.

When should Americans worry about the deficit? Unless in the rare situations that budget deficit accounts for 100% of the GDP, several countries are able to manage their deficits. Except for the circumstances when a country devotes to default on a loan, citizens should remain calm as the economists contain the situation. Deficits in government spending are necessary, especially when a country is recovering from a recession. Besides, that deficit is part of the government spending, which in the end is a proportion of the GDP. A rise in GDP growth enables a country to motivate the local investors and attract the foreign investors

Although the fiscal deficit may be decisive in some country’s economic position, it may lead to economic crisis in the long run. For example, the cumulative budget deficit in the US increases the foreign debt. The government, in its attempt to solve the debt crisis, may devalue the dollar to be cheap for it when settling debt. Increased debt may also lead to high interest rates charged by the central bank and hence higher interest rate on commercial bank lending, including interest on mortgages. This will discourage investors and hence a slurred economic growth. Huge fiscal deficits may also portray a political weakness that results to poor economic planning by the government.

Fiscal deficit is an economic problem in the US today. Although it seems manageable, policy makers need to give it a priority to prevent future repercussions. Causes of budget deficit vary from unpredictable recession to poor political policies. The US citizens should not worry about their current deficit, since it is contained, they should rather probe the economist to enact policies that would prevent the 2009 budget deficit.

Work Cited

Congressional Budget Office. Budget Projections. (2014). Web. April 16, 2014 http://www.cbo.gov/publication/45069

Taylor, Lance, et al. “Fiscal deficits, economic growth and government debt in the USA.” Cambridge journal of economics 36.1 (2012): 189-204. Web. April 16, 2014 http://cje.oxfordjournals.org/content/36/1/189.short