The federal deficit
When the Federal Administration is spending more cash than its actually amassing, a budget deficit in most cases ensue (Clayton 123). When this trend becomes persistent or rather continues over an extended period of time, the country’s debts increases in equal measure. Reducing a budget deficit, though very possible, is a characteristically daunting task that may demand a lot from all the economic facets. This document will give a brief but detailed analysis of the American deficit over the last decades (Clayton 126). In addition, the paper will discuss and analyze various historical data on the U.S. Federal deficit. The document will further stipulate various requisite measures that are essential in reducing the Federal deficit, and how such measures can be effected (Clayton 129). Indeed, in the coming years, with the increased aging population and accelerating military and healthcare costs, the Federal budget estimates are likely to experience more pressures (Clayton 133). Per se, the Federal budget is expected to be constantly rising compared to the rate of economic growth further explaining why reducing Federal deficits is becoming increasingly difficult. This document will, however, give an in-depth discussion and analysis on the best measures the Federal Government can employ to reduce its budget deficits.
Federal deficit history
As aforementioned, federal deficit occurs when the government’s aggregate budget expends are exceeding its total revenue in a particular fiscal year (Hughes, and Louis 16). This can be traced back to the mid-2000s when the federal deficit was in an actual decline as the nation was coming out an economic slump. The recessions had been caused majorly by the extremist attack on American soil and the subsequent wars. However, the 2008 recession (the crash) drove the deficit higher and the deficit did not fall below $ 1 trillion until the financial year 21013 (Hughes, and Louis 17). The country, however, is estimating a moderate budget deficit at approximately $ 500 billion per financial year by the 2020 (Hughes, and Louis 18). Every country wishes to have a moderate increase in its budget deficits, and even though this may be an ambitious thought given the increased population and need to service certain necessities, it is largely achievable.
From the chart above, The U.S. experienced its major peaks of federal budget deficits during the 20th century. This was during the occurrence of World War one and two as the country was forced to spend more that it was accruing in revenue to help fund some of their war activities (Hughes, and Louis 21). Throughout the 1960s, the U.S. federal budget deficit experienced perpetual and exceptional increases. This was also experienced during the early 1990s, but steadily declined through the remaining periods of the 1990s (Hughes, and Louis 23). The federal deficits accelerated in the early periods of 2000s, and after the 2007-08 economic downturn and monetary crisis, the deficit rose to over 10 % of the national gross domestic product.
When analytically traced from its founding as depicted from the chart above, the United States government did not continuously operate on a deficit (Hughes, and Louis 25). Most of the past regimes actually operated sometimes on a surplus and were very efficient and determined to spend within their limits. For instance, back in the 19th century, the U.S. Federal government characteristically only operated deficits during periods of war or during global financial catastrophes (Hughes, and Louis 26). Most of the 19th century governments actually ran budget deficits of less than 2 % of the national GDP particularly at the culmination of the 1812 war (Hughes, and Louis 27). Correspondingly, through the periods after the 1937 panic that culminated to the US – Mexican War (1846-1848), the U.S. Government did ran a deficit of over 7 % of national GDP. Similarly, at the end of World War one in 1919, the U.S. federal deficit was at 17.0 % of the national GDP. In addition, at the end of World War two in 1945, the deficit was at 27 % of the national GDP (Hughes, and Louis 29). After the wars, the economy rose steadily and the deficit reduced considerably, but began to rise during the 1953 Korean War as depicted in the graph below.
From the charts above, it is apparent that most of the 19th century budget deficits did emerge during periods of war and vanished considerably soon after the end of the conflicts (Hughes, and Louis 32). This can be attributed to greater fiscal judgments and decisions that were exhibited by the past governments (Hughes, and Louis 34). The U.S. government federal deficit started experiencing radical increments from 1974, and was accredited to the effects of the infamous ‘Nixon Shock’. President Nixon, in 1971 had dismissed the prospect of exchanging the U.S. currency into gold (Hughes, and Louis 36).
The eradication of the ‘gold standing’ by President Nixon implied that there was nothing to support the dollar, and this provided an avenue for the Congress to increase its aggregate spending. From the graph below, the period from the 1970s all through to the year 2010 resulted into remarkable changes in the behavior of the federal deficit (Hughes, and Louis 38). During these periods, the federal deficits averaged roughly at 2.8 % of the national gross domestic product. The effect of war periods and peaceful periods on the deficit is very explicit from the graph below with the national debt dramatically rising during the civil war periods (Hughes, and Louis 41). Increased expenditure and less revenue were experienced after the 2nd World War and resulted into the economy of the United States slowing down considerably (Hughes, and Louis 43). The federal deficit as a proportion of the gross domestic product (GDP), however, deteriorated abruptly after the 2nd World War reaching its highest point at 121 %.
Notably, the U.S. Government do operate on a fiscal year (finical year) basis which runs up to September 30th every year (Hughes, and Louis 46). The government vehemently vets its aggregate spending and revenue at the end of each financial year to determine its budget deficits and surpluses if any (Hughes, and Louis 49). This will enable them to identify such areas they can contemplate unnecessary or where they potentially did overspend. A detailed examination is crucial in initiating a conceivable decrease in the deficit and ultimately, the national debts (Hughes, and Louis 51). From the above graph, it’s also clear that each of the large budget deficit was preceded by period of economic boom and surpluses.
The ever-decreasing tax receipts in the American economy can be attributed to the expanding budget deficits experienced over the years (Hughes, and Louis 56). Federal expenditures are increasing at an alarming rate resulting into deficits being experienced in the country currently. The national debt is also at an all-time high and with the trend expected to increase in the coming years. In essence, the actual risk associated with such forms of debts spins around the challenges experienced in paying the accrued interests to the creditors. The current federal deficit is currently at roughly $ 440 billion dollars. The current value is actually the lowest since the global financial crisis of 2008 as the economy is still recovering from the economic shock. The income growth has also been outstripping the increase in expenditure, an indication of an improving economy.
Notably, the budget deficit recorded for the fiscal year 2015, a further indication of a stronger economy from the previous fiscal periods (Hughes, and Louis 59). This value is a decrease from the previous fiscal year and the trend can only be projected to continue in the subsequent financial terms. Correspondingly, financing such deficits may be challenging and overwhelming to the Federal Government as it may entail forgoing some traditional spending programs that are also very important to the U.S. government. Coupled with the inherent risks associated with accrued government debts, reducing such deficits is necessary (Hughes, and Louis 63).
The federal deficit has been increasing at a faster rate compared to the national GDP between 1970 and 2007 with approximately 100 % increment of the gross domestic product (Hughes, and Louis 64). The government has on a number of occasions funded its deficits through borrowed cash. As such, most economists in the U.S. are warning of an imminent debt crisis if the current trend in budget deficits are not kept under close control and check (Hughes, and Louis 68). A simple analysis of the government expenditures versus its gross domestic product indicates a massive deficit that must be financed through any means possible. The declining tax revenues can be attributed to the slow growth of the economy among other factors advanced in the subsequent discussions (Hughes, and Louis 72).
Sources of government spending
The inherent question many economists ask in relation to the 1970-2010 budget deficit increments spins around potential factors that can be attributed to the increased government spending (Clayton 134). For example, the increased threat of American and global security forced the past governments to increase their spending on security among other related facets of the economy (Clayton 136). Similarly, the increased need for accessible and affordable healthcare among the populaces obliged the subsequent governments to increase their spending in the delivery of health services. Salaries and other remunerations to the federal government employees can also be credited to the increased expenditure by the federal administration (Clayton 137). Other federal expenses includes; preserving the U.S critical infrastructures among financing other important facets of the U.S. economy.
For example, social programs and unemployment compensation programs are some other facets that have been claiming a significant portion of the U.S. economic expenditures (Clayton 139). Most of these spending, however, are mandatory and can be attributed to the continuous and persistent increase in U.S. budget deficits. For instance, payments made to the social security programs are very challenging to cut as this may mean curbing a considerable number of people from accessing these essential services. Spending on homeland security has also been increasing since the terrorists attack in the U.S (Clayton 143). Moreover, virtually all the increments in government spending are currently in the form of transfer payments (such payments made by the government with no benefit attached, for instance, social programs).
Sources of government revenue
This particular section will elucidate the various sources of government revenue so as to establish the possibilities of introducing tax increases to help in resolving the deficit and debt problems. Currently, the two primary sources of the U.S. Government revenue included; individual revenue taxes and social security taxations (Clayton 144). Others are the corporate revenue taxes and custom duties among other essential bases of revenue to the U.S. government (Clayton 145). The government can also sell its securities when faced with serious economic challenges to help in financing its activities. When all the possible government revenue sources have been utilized and the total revenue still below the expected government expenses, a budget deficit ensues (Clayton 146). The government may also borrow from different financial institutions its bid to finance its activities.
The implication of the U.S federal deficit
The primary causes of the federal deficits as aforementioned in this document can be traced back in the 1970s then the then administrations defiled the long-standing traditions and started operating on a continuous budget deficit (Clayton 147). In addition, as already reiterated, the increased budget deficit was as a result of the increased spending relative to the gross domestic product that remained slow in its growth and expansion (Clayton 152). The increased spending without a commensurate increase in incomes will in the long run stall economic growth. Financing a deficit entails borrowing from other avenues, for instance, financial corporations and this ultimately puts the government in debts.
If the trend becomes persistent, most economists assert that the government will be obliged to cut most of its crucial expenditure to avoid a potential debt crisis (Clayton 153). Improved government expenditure in most economies may imply a rise in taxation to finance the potential deficits. However, this may not concur well with majority of the citizens who are already burdened with taxation of their basic incomes (Clayton 156). The U.S. deficit problem may in the long run become a deficit or debt crisis in situations whereby the Federal Government is obliged to finance its debts using the accrued revenue. Drawing from the Greece situation, the crisis was because the administration was required to pay its amount overdue at a sum that tripled the initial rates (Clayton 163).
Actions to decrease the federal deficit
The government can opt to sell its bonds so as to get money to help in financing the federal budget deficit (O’Donnell 12). This will allow them to sort the challenges associated with imposing more tax burden on the populaces and avail necessary cash that can be used in stimulating the economy (O’Donnell 14). In theory, the government will thus be positioned to generate extra tax revenue from the corporations and taxpayers. Although selling government bonds seems like a very logical process theoretically, one must keep in mind the fact that they must pay interests on the money they initially borrowed to finance the deficit (O’Donnell 16). As such, the initiative not be as effective in the long run given that the bond revenue may be used to finance some of these debts instead of stimulating the economy (O’Donnell 19). For example, since the 2008 global financial crisis, the government has allowed the buying of its various financial securities to help spur the economic recovery. In the short term, the initiative has proved to be effective in most economies.
Influencing the rates of interests
The federal administration may opt to maintain a lesser interest rates in their bid to stimulate the ailing economy (O’Donnell 22). A lower interest rates implies more citizens will be in a position to borrow and make capital investments in the economy. These investments will in turn generate the much needed tax income that can be used to finance and reduce the federal deficit, ultimately resulting into a reduction in the national debts (O’Donnell 23). In addition, the low interest rates implies that more money will be circulating in the economy, which in turn leads to job creations and potential tax revenues (O’Donnell 26). However, most debt-ridden administrations is only effective in the short run as a tradeoff exists between the potential inflationary pressures and employment opportunities in an economy.
Spending cuts and raising taxes
This entails the federal government cutting a considerable amount of its spending to adequately facilitate a potential reduction in the budget deficit (O’Donnell 27). For instance, the government may consider reducing its spending on social security programs among other facets of the economy that may be considered ‘excess’ (O’Donnell 29). Tax increment is a common tactic that most governments across the world occasionally use to finance its deficits in the budget (O’Donnell 32). This may be attributed to its inability to cut some of its important expenditure making it look for other potential avenues and tactics to help reduce or finance its deficits (O’Donnell 34). The administration should also contemplate implement strict tax codes that adequately facilitate the collection of tax revenue from individuals and corporations (O’Donnell 37).
This will upsurge government revenues and ease the potential decrease in the federal deficits. Comprehensive tax reforms in the U.S. are long overdue given the potentially high number of small businesses and personalities evading remitting income taxes to the government (O’Donnell 39). The government should also contemplate strict adherence to the ‘Buffett Rule’ that asserts that those corporations of individuals making above $ 1 million should be taxed more compared to the middle class populaces (O’Donnell 42). The accrued amount will be efficient in reducing federal deficits and swelling government proceeds in the long run.
The government can share some of the significant costs in the delivery of amenities to the populaces (O’Donnell 46). For example, the government should consider sharing some of the cost associated with the augmented expenditure. For instance, the expenses for air traffic services should be done more justifiably among all aviation players (O’Donnell 48). The federal government should also consider providing financial relief to postal services and undertake serious reforms in this important sector of the U.S. economy (O’Donnell 52). Correspondingly, the government should consider health savings reforms and initiatives to help in controlling the costs associated with the provision of affordable healthcare to the populaces (O’Donnell 54). This, according to the congressional budget committee, will result into a reduction of federal deficit by approximately $ 1 trillion in the course of the next two decades. Initiating such reductions in healthcare spending will also increase competence and eminent service provision of healthcare to the U.S. citizens (O’Donnell 54). Failing to repeal or implement such necessary reforms in healthcare provision will result into the country increasing its expenditure in the sector adding more damage to the deficit (O’Donnell 56).
The administration should also consider reducing its coverage on Medicare in their attempt to avoid ‘bad debts’. This proposal will result in the alignment of the Medicare policies with the private sector health providers allowing individuals to self-cover and finance their coverage (O’Donnell 62). This will effectively reduce bad debts and ultimately results into a reduction of the budget deficit. This approach will reportedly save roughly $ 35 billion over the next decade (O’Donnell 65). Cutting potential wastes, fraudulent activities, and abuses in all government sectors will also facilitate the reduction the federal deficit. For instance, curbing such payments that are made fraudulently to the wrong individuals and for the wrong reason in government agencies will be essential in reducing the expenditures (O’Donnell 72). Federal assets that are not effectively used should also be disposed or sold off to the public to raise more cash. The president, together with the cabinet can also be encouraged to reduce their administrative overheads considerably (O’Donnell 75). Another area the government should consider reforming is the acquisition of military ware and a possible reduction in military spending.
In essence, the fiscal year U.S. budget estimates has been steadily increasing over the past decades given the increased economic dynamics. For example, the estimated federal budgets for the subsequent fiscal years are likely to have an increasing trend for a foreseeable future. Each fiscal year, the budget is expected to increase from the previous year with more government spending largely expected. The primary motivation for this constant rise in the federal budget can be hailed to the few monetary predicaments that the country has been facing in the last decades. Starting with September 11th terrorists attacks on the American soil, to the housing gurgle abounding, to the 2008 financial crisis, America has sometimes been hit hard with economic realities. The amalgamation of all these key financial failures, along with other fiscal tasks that the government is obligated to execute has lead America into massive budget deficits over the last years. In fact, the U.S. is in dire need of a massive financial stream to help fuel its operations. However, to some economists, the U.S. government budget estimates are facing various challenges majorly because of the huge amount of debt accrued over the years and not adequate revenue is being collected by the government.
Though the federal budget deficit has over the past ten years been a test, the shortfall is considerably shrinking. The U.S. government for sometimes now has been operating on a deficit, a fact attributed to the increased government expenditures. The various causes of this excess spending can be attributed to a number of factors that are diverse depending on the significance. Some of the causes as aforementioned in the document includes; war periods and various economic slumps. The document also discusses a number of different policies and actions that can be passed to attempt and control the federal deficit problem, for instance, cuts in government spending. The U.S. federal deficit is as peer the moment on a decline and this a positive news to the economy. This decline can be attributed to the improved economic actions, among other significant initiatives.
Clayton, Gary E. “The Federal Deﬁcit.” Business Economics (2005): 29.
Hughes, Jonathan RT, and Louis P. Cain. American economic history. Pearson College Division, 2011.
O’Donnell, Michael P. “Can we reduce our federal deficit and create jobs by making the healthy choice the easiest choice?.” American Journal of Health Promotion 26.2 (2011)