The U.S. budget deficit for the 2015 fiscal year is at $ 465.5 billion. According to the information from the Congressional Budget Office, they estimate the deficit to drop to $ 426 billion by the end of the year (Congressional Budget Office, 2015). It will be regarded as the lowest deficit since the year 2007. Therefore, the current budget deficit has decreased compared to the last few years. However, in the previous years and particularly the 2014 fiscal year the budget deficit was at around $ 483 billion and in 2013, the budget deficit was $ 680 billion. Moreover, the deficit has been above $ 1 trillion in the last four years before 2013 (Congressional Budget Office, 2014).
A debt occurs when the federal government spends more than it collects in terms of revenue. Therefore, in such situation, the government will borrow money to cover the difference. Precisely, the total amount of U.S debt is approximate $18.153 trillion. The current amount of debt has increased compared to the last few years. In the year 2014, the U.S debt stood at approximately $ 17.8 trillion. Similarly, in 2013 and 2014, the amount was $ 16.7 and 16.1 trillion respectively (U.S. Department of Treasury, 2015). The majority of the U.S debt is held domestically and it include the public and the federal accounts. However, a good portion is also held by the foreign investors. The foreign investors include governments and their citizens who both purchase U.S debt.
It is important for the current administration to think about ways to reduce the national debt. However, some of the proposals include the following. First, the government has proposed to reform the major entitlement programs. The programs include Medicare and Medicaid, and social security. The government should slow the growth of entitlement spending. It is estimated that the entitlement programs account for about 44% of the spending incurred by the federal government. Similarly, the programs are expected to expand rapidly than the entire economy in the coming decade. The Congress should correct the cost-of-living of the social security by adjusting it so that it reflects the measure of inflation accurately. Also, the eligibility age for the Medicare should be raised to match social security. Most importantly, the various Medicare programs should be consolidated with a single premium. The last reform of entitlement program should be to reduce Medicaid subsidies particularly, for the higher-income beneficiaries. The reforms will improve the finances of the country, stabilize the economy and reduce the possibility of the nation running bankrupt. The federal government is also proposing to reform the tax code. The tax code for the current administration is too complex and needs to be reformed. It contains targeted special preference that will create economic inefficiencies. The income tax code will be reformed by redesigning it so that it generates adequate revenue to for the fiscal goals. Besides, tax plan will be based on the progressive way that entails taxing the rich more. The action will be achievable if the Congress unite and correct the federal government’s disastrous fiscal course. They should also control the federal spending.
Large budget deficit/debt has the following economic consequences. First, the budget deficit/debt results in crowding out private investment. The increase amounting to borrowed funds by the government causes a reduction in the number and size of the private sectors. Therefore, less private investment in the economy reduces the opportunities to have innovation and technological advancement. Similarly, crowding out private investment leads to less economic growth. For this case, there will be fewer jobs, lower salaries and reduced opportunities to further career. Second, budget deficit/debt leads to a higher inflation rate in the country when the government raises the money supply to pay the debt (Agnello, & Sousa, 2013). Inflation reduces the purchasing power of the people, and this has an adverse effect on the poor and middle-class individuals. Similarly, it raises the prices of goods and services destabilize the private economy and slow economic growth. The third consequence is increased interest rates. If the government sells more bonds to generate revenue, then the rates of interest will increase. The government will be forced to increase the interest rates to attract investors to purchase bonds. The higher rates of interest on bonds will increase domestic investments rates that include consumer and business loans, credit cards, and mortgage. The situation will reduce the amount of borrowing by the investors and citizens, and this will slow the growth rate of the economy.
In the recent years, the federal government decided to cut its spending in various sectors, and the action resulted in the following impact on the economy. First, spending cuts slowed down the economy. The government reduced military spending, and the action had an adverse effect on the economic growth. For example, the government withdrew its military from Afghanistan and Iraq. Similarly, cuts in defense spending had an impact on employment. The defense contractors lost jobs because of the decrease in the purchase of equipment and services. Also, the jobs loss will spread to all the manufacturing industries and are involved in the direct and indirect supply of defense equipment. The increase in unemployment adversely affected the economic growth of the country.
Also, spending cuts affected the voluntary sectors. Voluntary sectors have critical roles in preventative services. The organizations were hit by the reduced spending, and they were unable to absorb the impact. Because of the low levels of financial support due to spending cuts, the organizations were forced to close. After closing, it was difficult to re-create them. The closure of the voluntary sectors has affected the economic growth since they were able to provide services to the country. The voluntary sectors have unique skills and a good relationship with the people that would have positively impacted the economy.
A different spending cut that I will recommend to the federal government includes the following. I will recommend the government to cut spending by reducing the size of the federal bureaucracy. Reducing the size of the bureaucracy will help the government to save some money and use it in other projects or pay the debts. Most of the taxpayer’s money is wasted on paying the large size of the federal bureaucracy. Similarly, the government provides funds to more than 2,200 subsidies and various benefits programs, and the whole funds are wasted through fraud. It will be ideal if the size is reduced and the money diverted to the right channel. Second, I will recommend the government to consolidate duplicative functions. Cutting or consolidating ineffective, outdated or duplicative programs are important to the economy since it limits the amount of money spent. Similarly, it will reduce the situations of deficits/debts in the economy and hence fostering competitiveness. Therefore, consolidating duplicative functions will ensure that the government meets its fiscal target.
Agnello, L., & Sousa, R. M. (2013). Fiscal policy and asset prices. Bulletin of Economic Research, 65(2), 154-177.
Congressional Budget Office. (2014, February 4). The budget and economic outlook: 2014 to 2024. Retrieved from http://www.cbo.gov/publication/45010.
Congressional Budget Office. (2015, January 26). The budget and economic outlook: 2015 to 2015. Retrieved from http://www.cbo.gov/publication/49829.
U.S. Department of Treasury. (2015, April ). Major foreign holders of treasury securities. Retrieved from http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
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