The budget deficits are situations where the government expenditure exceeds the available collected revenues in a fiscal year. Deficits have existed in the United States state budget, a situation that has forced the government to borrow. Economic slowdowns are the leading causes of a deficit because of the poor performance of taxpaying organization (Tucker 303). The United State budget deficit increased in the years 1960 to 1990. The deficits reduced between the years 1990 to 2006, and started rising again during the Bush administration. The 2012 financial year shows the government has a shortage of $1089 billion compared to $161 billion in the year 2007. The deficits are projected to reduce at the end of 2013 fiscal year to an amount of $901, which means the government is working on deficit reduction. The government has a limitation on the money it can borrow either domestically or through the government-to-government borrowing. The debt ceiling by the end of January 2012 was $16.394 trillion. This was to allow the government to increase borrowing to reconcile deficits in the 2012 fiscal year.
The United State government experienced minimal budget deficits in the 19th century. The era saw deficits of at least 2% during periods of war. The worst budget deficit experienced in the 19th century was 7% during the Mexican war. The other key budget deficit was during the first and second world war in the 20th century. The war periods saw the government increase spending on defense and infrastructure reconstruction of war zones (Courant 24). The additional spending was not provided in the approved budgeted amount causing necessity to borrow.
The United State deficit is settled through public borrowing or government-to-government borrowing. The government-to-government borrowing involves the central government borrowing from foreign countries like Britain and China. The borrowed amount of money has to be repaid within a stipulated period with some interest on percent basis of the total borrowed amount. Foreign governments like China are purchasing into the governments bonds. The purchase of the bonds makes these countries obtain an interest as at the end of each fiscal year. The government before listing them in the stock market determines the interest on bonds. At the end of 2011, the Chinese government held 20% of the United State bonds held by foreign governments (Foot 159). The government faces the possibility of running low on foreign loans if the foreign governments stop buying into the bonds. Kuwait is one country that reduced its buying into the United State treasury bills. This risk is driving the congress to look for alternative ways of financing the budget apart from bonds and treasury bills.
The government has started borrowing from the social security fund to support the budget deficits. The money is supposed to pay pensions to workers during their retirement age. Default of the government in paying money borrowed from the social security fund has led to disaster in payment of pensioners. The body has to proceed to borrowing to ensure it fulfills its obligations of paying seniors citizens their pensions.
Risks have risen from large borrowing done by the government to settle deficits in a fiscal year. The investment by the public in infrastructure has reduced because of reduced lending capacity of banks (Boyes 33). The reduced investment has an adverse effect on economic growth. The government domestic borrowing has led to increase in interest in bank loans making them unpopular among the investors.
The act of borrowing to finance government deficits leads to the need of provision of funds to service the loans. The servicing money is used to settle interests on loans and payment of maturing loans putting pressure on future budgets. The spending on repayment programs means that the government will not invest in critical programs like education to avoid default in loan repayment. The government has proposed increase in taxes on the wealthy to reduce the budget deficit, which might reflect negatively on the economy. Increase of tax on the rich might discourage people from work, which leads to slow economic growth. Increase of tax on the poor will lead to reduction in the disposable income that leads to reduction in the amount saved by the low-income households. The low saving means no capital investment will be made by the families and no more job and wealth creation will take place (Burks 112).
The United State government has put cost-cutting measures to reduce government-spending deficit. These measures have registered both positive and negative effects on the economy. The reduced spending has led to reduced supply of money by the government into the economy. The government may be forced to cut on development projects as it cuts on army cost and wars leading to slow economic recovery from recession. The government faces challenges in cutting the spending in the mandatory sectors like education, social security, and Medicare. The increasing number of people seeking Medicare leads to an increase in budget appropriation in health which leads to increase in the deficit. Ways to reduce spending in the chief economic activities should be developed to ensure total reduction in the United State budget deficit does not have negative impact on the economy.
Works Cited
Boyes, William. Macroeconomics. Boston: Houghton Mifflin Co, 2008. Print.
Burks, Marie. Deficit why should I care. New York: A press, 2011. Print.
Courant, Paul. Federal budget deficits : America's great consumption binge. Englewood Cliffs, N.J: Prentice-Hall, 1986. Print.
Foot, Rosemary. China, the United States, and global order. Cambridge New York: Cambridge University Press, 2011. Print.
Tucker, Irvin. Macroeconomics for today. Mason, OH: South-Western Cengage Learning, 2011. Print.
