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Reduction of Federal Budget Deficit

Reductionof Federal Budget Deficit

Reductionof Federal Budget Deficit

United Statesfederal government has run deficit budgets in 36 out of the last 40years. A deficit budget occurs when government spending exceeds thetotal taxes collected. The government of the day has to borrow eitherinternally or externally to fund the debt. Budget deficits are notnecessarily bad because they accelerate economic growth. However,debt increases beyond certain levels impact the economy negatively.For instance, high government debt implies that the savings generatedin the economy will be used to repay the debt instead of beinginvested in development projects. High interest costs created by hugedebts discourage work and savings are reduced. US annual debtcurrently stands at 7 percent of gross domestic product compared tothe general average of 3 percent of GDP. This paper suggestsdifferent policy options that should be undertaken to reduce thebudget deficit by 2.5 trillion US dollars over the next 10 years.Some of the policies relate to reducing spending while others relateto increasing taxes. By applying the following measures, thefederal government will be able to reduce spending by 940 billiondollars, increase revenue by 1561 billion dollars and eliminate 2.501trillion dollars from the federal budget deficit. By increasing taxeson alcoholic beverages by 40 cents on a fifth of liquor and 50 centson a pack of beer or a bottle of wine, the federal government willincrease revenues by 63.8 billion dollars. Eligible business ownersshould pay Medicare/social security taxes based on both their shareof firm’s profit and their personal income. This action will helpthe government increase revenue by 129 billion dollars. An increaseof corporate tax rate by one percent will lead to 113 billion dollarsincrease in national revenue. A repeal of certain tax preferences forgas, oil and mining industries would increase tax revenue by 33.8billion dollars. Special deduction offered to some productionactivities should be repealed to reduce spending by 192 billiondollars (Bartel &amp Davenport, 2014). The federal governmentshould impose an annual fee on large financial institutions, and thiswould help raise 64.4 billion dollars. The terms for federal gas andoil leasing, including expansion of offshore drilling should bechanged, and this act would reduce the deficit by 5.9 billiondollars. Federal insurance premiums that are paid by employers shouldbe increased to cut the deficit by 5.3 billion dollars. An increasein excise tax on cigarettes to 1.51 dollars a packet would increaserevenue by 37.4 billion dollars. Ford class aircraft carriers used bydefense should stop being build to cut on spending by 10.2 billiondollars. Development of a new long-range bomber should also bedeferred. Pell grants should be limited to the neediest students tocut on spending. Retirees who had higher earnings should have theirsocial security reduced. Highway funding should be limited torevenues from fuel taxes and other roads related taxes. If this weredone, spending would reduce by 64.5 billion dollars (Roubini &ampSachs, 2009).

The different policies described above have economic benefits andtradeoffs. Limiting funding of highways to user fees has manyeconomic benefits. Some of these benefits include reduction ingovernment spending, reduction in air pollution, reduction ofcongestion on major highways and promotion of wider infrastructureinvestments. The limitation associated with such a policy is thatless fuel would be consumed. Individuals who own cars would preferusing public means and thus leaving their cars at home. An increasein corporate taxes by one percent will lead to various economicbenefits. The national government will raise more finances and thusreduce the debt. However, the result of an increase in corporatetaxes will mostly depend on the timing. During the recession,spending would decrease significantly but during the boom, spendingwould not be affected much. The tradeoff of increasing corporatetaxes is that the investment spending can reduce significantly.Investors would cut their investments and this will reduce theirearnings. The economy can also be affected if the reduction ininvestment spending is significant. Increase of excise tax oncigarettes and alcoholic drinks have the economic benefit ofincreasing revenue and thus lowering budget deficit. The expectationwould be that consumption of these products would not be affected bythe increase. In reality, however, increase in these taxes will causea reduction in consumption thus lowering the level of spending in theeconomy. This policy will affect both the users of these products andthe producers. The consumers of alcohol and cigarettes will be forcedto take less of the products due to the high prices. The companiesthat produce these products would also be affected because demand fortheir products would be affected negatively. If the impact issignificant, it may affect economic growth in the end. There are manyeconomic reasons why budget deficit should be decreased. The increasein public debt beyond certain levels implies that most of thecountries savings will be used to pay interest costs. When debtlevels are high, the country’s savings are used to pay the debtinstead of developing the economy. The result of this is sloweconomic growth (Feldstein, 2011).

References

Bartel, B. &amp Davenport, J. (2014). Interactive game: You fix thefederal budget. Retrieved on 1st April 2014 from:

http://hamptonroads.com/2014/02/go-ahead-you-balance-federal-budget

Feldstein, M. S. (2011). The budget deficit and the dollar.Macroeconomics Annual 1(3).

Roubini, N., &amp Sachs, J. D. (2009). Government spending andbudget deficits in the industrial economies. New York: Wiley.