Monetary and fiscal policy is a way in which the United States government controls its economy through changing bank reserves and increasing interest rate. In the budget year starting commencing October 1st 2013 and ending September 30th 2014, the government of the United States estimated its budget to be 3.318 trillion dollars. However, its estimated revenue was 3.034 trillion dollars. Therefore, the estimated deficit was 280 billion dollars. This was not the first time the government was experiencing a high budget deficit. In the earlier years during economic recession, it had also experienced high budget deficits. This high budget deficit has various economic consequences. The notable effect in the long term is of course the high debt which is dragged into the economy. An economy, especially a big one like the United States’ should not have a debt (Alvarez & Kehoe, 2002). This is because there will be higher taxes which will hinder growth since most people will not be investing. Another consequence of a high debt in the economy is worry by creditors. Money which is supposed to be lent for investment will not be available in the economy.
The bond ratings also go down as a result of a high deficit. The currency also loses value. When bonds lose their ratings, institutions and individuals lose confidence in the investment. If investments are not made on the bonds, the government loses a very crucial part of its source of revenue and monetary policy control tool (Alvarez & Kehoe, 2002). This long term effect becomes dire in the economy and being the most powerful country economically, the country loses its credibility.
The short term effect of a high deficit in the country’s economy is the liquid money available. When money is unavailable in liquid form for use, there will be reduced productivity and reduced investments. This problem is likely to persist as long as the deficit remains high.
There are a number of ways to reduce the budget deficit that the government of the United States can employ. The most notable one of course is reducing the security social benefits by at least 15 percent (Beetsma, 2004). This will reduce taxation. Additionally, the government can eliminate the direct payment it administers to agricultural producers. This will reduce the amount of money that the government spends. Revenue will therefore end up being more than the expenses. Finally, reduction of subsidies, especially to Freddie Mac and Fanny Mae, can also be used to reduce the government deficit. This will save the government an estimated 19 billion dollars.
References
Alvarez, F., & Kehoe, P. J. (2002). The time consistency of monetary and fiscal policies. Minneapolis, Minn.: Federal Reserve Bank of Minneapolis, Research Dept.
Beetsma, R. M. (2004). Monetary policy, fiscal policies, and labour markets: Macroeconomic policymaking in the EMU. Cambridge, UK: Cambridge University Press.
