USA federal deficit has been high since 1961, in 2010 and 2013, the debt-GDP ratios raised alarmingly to 62% and 78% respectively. There are obvious reasons for a need to cut it down. The following are alternatives to cutting down government debt; reducing interest rates, hiking taxes, Pro business, default, issue bonds, bailout, or the mix of the options (Hungerford, n.d.).
The principle source of funding for most government annual master budgets is the tax. There are other substantial sources of funds to state and federal governments. Borrowing has been popular in financing a deficit federal or comprehensive state budget. However, some Americans feel that government borrowing to finance a deficit budget is an unnecessary evil, Mr. Speaker, here is the reasons why cutting the government spending will hurt Americans more severely than the tax burden of servicing the debt financing. Study by Lavee, Beniad & Solomon (2011) on the causality of debt instruments revealed that high debt levels might not slow down economic growth.
Economic growth is a basic government goal and therefore USA government is in pursuit of economic growth as it is a standard metric of performance. Keynesians model insists that increased government spending, is an effective economy booster according to Ghosh & Gregoriou (2007). USA government has played this card all the way through, for instant after the world war two, USA debt to GDP ratio was 55%, after the war USA was fast to reconstruct and recorded great economic flourish above its peer. In 2010, USA reconstructed from an economic turmoil since the military cost was stirring the attention of the Congress, the government raised the debt-GDP ratio to 62%, and eventually the economic growth metrics were in favor of the government performance.
Government spending is a very important and sensitive variable in constructing customized fiscal policies. Besides economic growth, this variable is helpful in stimulation employment. Reduction in the government might increase the unemployment level, which in turn will increase the proportion of the recurrent budget, due to increase burden on social utility costs. Eventually, the government tax coffer will shrink since disposable incomes have reduced significantly due to increased levels of unemployment caused by low aggregate demand.
There might be economic hardship; the cost of living will increase, due to increased substitution effect of borrowing with the increased tax rate. The disposable income will reduce, this will adversely affect consumption patterns, America business-entrepreneurship hub will collapse to its feet, since the cost of doing business will be high and increase breakeven requirements. This will deter entrepreneurship, and national output will be adversely reduced (Lambertini, n.d.).
Increasing government spending has been very effective in maintaining income tax to be optimal for the best interest of the economy, the federal government responsibilities have been inflating daily, through the policies made by the congress house, these responsibilities technically are constitutional right to the citizens and place the government on obligations, the cost of such obligations would not always justify the tax hikes, whereby, it is obvious that the tax rates are optimal; therefore adjustments are not welcome. Before, governments spending cut motion is moved to Congress floor, motion to reduce federal governments constitutional responsibilities should be passed and signed.
There is a worry from the lessons learn from the adverse downfall of Japan and Greece economies due to the looming deficit. However, we have to use the right tool for the job, American policy makes are recommended to mix carefully three alternatives; cut spending, reduce interest rates and slightly increase tax rates.
Ghosh, S., & Gregoriou, A. (2007). The composition of government spending and growth: is current or capital spending better?. Oxford Economic Papers, 60(3), 484-516. http://dx.doi.org/10.1093/oep/gpn005
Hungerford, T. Reducing Federal Budget Deficits: Considerations. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2207383
Lambertini, L. Are Budget Deficits Used Strategically?. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1443808
Lavee, D., Beniad, G., & Solomon, C. (2011). The Effect of Investment in Transportation Infrastructure on the Debt-to-GDP Ratio. Transport Reviews, 31(6), 769-789. http://dx.doi.org/10.1080/01441647.2011.596581
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