Introduction and Causes of the Budget Deficit
The United States Budget Deficit has been in the news recently. This is because of the huge gap between revenues and expenditure that has resulted in a budget deficit of more than a Trillion Dollars each year. The situation was not so bad during the last decade when under President Clinton; the US actually ran a budget surplus. However, once President Bush took over, the budget surplus turned into a deficit mainly because the US was paying for the Iraq war that was very expensive and extended the tax cuts for the rich, which meant that the government went without the tax revenues. Moreover, the spending on the Iraq War and the defense related spending were so huge that the surplus left behind by President Clinton turned into a deficit by the time President Obama took over (Stiglitz,2010, 80).
The options before President Obama on assuming office were very limited, as he had to contend with the global economic crisis that resulted in several banks and corporations going bankrupt. This meant that bailout packages and stimulus spending had to be undertaken to restore confidence in the banking system and the financial sector. It was for this reason that the Obama administration bailed out the banks and corporations and engaged in monetary stimulus to kick-start the economy.
The result of all this spending was the increase in the Budget Deficit to the point where the future generations would have a tough time paying for the legacy of woes left behind by the current and past generations especially the Baby Boomers. Indeed, it is a sad state of affairs as the gaping hole in the budget is being made up through the Federal Reserve’s quantitative easing or QE. As we shall discuss later, even this easing is supposed to be tapering off which means that the American economy and the global economy are in for some tough times ahead.
The budget deficit is primarily financed through the issuance of Treasury Bonds or what are known as Sovereign Bonds that are in turn purchased by the Federal Reserve. These purchases of the bonds increase the revenues to the government though the debt burden goes up. Of course, this is much better than the sale of these bonds to foreign buyers like China, which increases the advantage that they have over the United States. This means that it is better for domestic purchases of the Treasuries rather than purchases by foreign buyers and this is the direction that the US economy has taken over the last few years (Rajan, 2010, 17).
The process of purchasing the treasury bonds by the Federal Reserve is known as Quantitative Easing or QE and already the Fed has engaged in THREE rounds of QE until date. Though the Fed has announced that it would taper off the QE by sometime next year, there are no indications that it would happen in actuality. The reason for this is that the US government Budget Deficit is unlikely to reduce over the next year and hence, the Fed cannot taper off the QE without causing an economic crash. These are some of the ways in which the budget deficit is financed.
Some Solutions to Solve the Problem of the Budget Deficit
The solutions to fixing the Budget Deficit would include raising taxes on the wealthy; cutting defense related spending, and reducing the incentives given to the oil and gas sector and instead providing more incentives for alternative energy sources. If we take each of these solutions in turn, we find that the first one envisages raising taxes on the wealthy to the pre-Bush levels, which would raise considerable resources to finance the deficit. The point here is that this method would solve the problem of running huge deficits without raising taxes on the other segments that would go against the grain of social justice and social welfare (Rajan, 2010, 27).
The second solution, which is to do with cutting defense spending, is equally feasible, as it would entail huge savings as a result of trimming the bloated American Defense Budget. The key aspect here is that the US is already the dominant power in the world and hence, there is no need to spend so much on defense.
Moreover, the threats to the country have decreased over the years and hence, this is a good time to cut spending on Homeland Security as well. As the foreign wars cost more and are expensive to prolong, bringing the troops back home from Iraq and Afghanistan would save the American taxpayer a lot of money and would result in plugging the budget deficit.
The third solution to the problem of huge deficit is that the incentives provided to the oil and gas sector must be reduced and instead, there must be more focus on alternative energy sources. The point here is that the oil and gas sector is anyway hugely profitable and hence, there is no need to extend further concession to the sector.
This solution would not plug the hole in the deficit to the extent that the other solutions would but nonetheless, it would be a step in the right direction as reducing dependence on oil would result in lesser outflow to imports as well as greater savings from the American populace. Of course, when we say oil and gas sector, we mean the oil sector primarily as the prospects for natural gas are looking up and hence, there can be some sort of balancing of the incentives for the natural gas sector and the alternative energy sector.
Conclusion
This paper has discussed the US Budget Deficit from multiple perspectives and has suggested some solutions to plug the deficit. The battle over the Budget has become very intense and bitter in recent years as the high stakes negotiations are primarily over which sectors to cut spending and which sectors to increase funding. In this context, it must be noted that the solutions suggested in this paper are workable and practical and with bipartisan support, the budget can be passed without difficulty.
The key point to note about the Budget Deficit is that the whole process is being held hostage by politics and hence, it would be better for all parties to sit together and arrive at a compromise over the cuts and the increases in spending rather than bicker and squabble leading to political gridlock.
Before concluding the paper, it would be pertinent to note that more debt is not the answer to the existing debt and hence, it is better to live frugally rather than live beyond one’s means. Therefore, it is in the best interests of all stakeholders to take appropriate action on ways and means to reduce the deficit as quickly as possible. In conclusion, we cannot burden our children with our debts and we have a responsibility towards future generations.
References
Rajan, R. G. (2010). Fault Lines: How Hidden Fractures Still Threaten the World Economy. New York: Princeton University Press.
Stiglitz, J. (2010). Freefall: America, Free Markets and the Sinking of the World Economy. New York: W.W. Norton.
