Question 1
Answer for Student 1 According to the article governmental expenditures can be subdivided into two categories: discretionary and nondiscretionary. Discretionary cost is the one federal government faces when paying for special items, which are included into the budget every fiscal year. Nondiscretionary expenditures are determined by entitlement programs, such as Social Security and healthcare, thus they are formula-driven and cannot be changed in the short-run. Both of them have contributed a lot to the current debt, however, nondiscretionary expenditures also persist, therefore taxpayers will pay more and more to cover these costs. Hence, the tax burden will continue to grow, unless cost reduction reforms are implemented.
Answer for Student 2 Government is spending money in two ways: to cover discretionary and nondiscretionary costs. The former refers to the special expenditures, which are determined every fiscal year. The latter, however, are formula-driven, therefore their calculation remains the same unless formulas are changed. Since the government is not likely to reduce both discretionary and nondiscretionary expenditures, because such actions will not yield a positive public reaction, governmental costs will continue to rise every year. Therefore, the tax burden will also continue to rise, in order to fund the ever-growing expenses.
Question 2
Answer for Student 1 If an individual spends more than he/she is able to afford, there is a risk of running into debt. The same logic is applied to the government, which has to borrow money from external sources in order to fund additional expenses. However, country public debt is usually viewed with the reference to the current GDP level, therefore, if the country is still able to produce enough to fund the debt, the situation is under control. The problem becomes more acute when the government is unable to pay the interest on its debt, thus driving market interest rates up and endangering local companies and taxpayers’ money.
Answer for Student 2 Governmental expenditures can exceed revenues just like those of an individual. The acceptable level of individual debt is determined in relation to one’s income, while country’s public debt is measures in relation to the GDP. If the country is not able to meet debt obligations because of the low level of economic activity, it is likely to default, damaging business and taxpayers. The risk of such a situation is currently observed in several European countries. However, until this is the case, the country can continue spending in excess of its earning, relying on the future taxpayers to cover the increasing interest expenses.
Question 3
Answer for Student 1 Total expenditures for unfunded tax liabilities cannot stay on the same level, as the current estimate suggests. The projected value exceeds country GDP by 300-400 percent, therefore the final cost is even hard to comprehend. In order to provide for this expenditures in the future it is either necessary to cut them dramatically, or to increase taxes for the population. Although the first measure is going to be very unpopular, constant increases in taxes cannot be a sustainable measure either, therefore the government will have to take steps to reduce expenditures for Social Security and Medicare.
Answer for Student 2 There are two ways to provide for the increasing expenditures on Social Security and Medicare. One way implies a significant increase in the tax burden, which would imply that taxpayers in the future will give up most of their income to provide for the poor and for seniors. Continuous tax increase is not sustainable, therefore some other ways to solve the problem should be sought. Thus, a dramatic cut in Social Security and Medicare costs is likely to be implemented. Although the reduction in such expenditures is always received negatively by the public, it is a necessary and the only step to meet the rising costs. Therefore, current estimates for the expenditures are likely to be reduced in the future.
References
Miller, Roger LeRoy, and Daniel K. Benjamin. The Economics Of Macro Issues. 4th ed.
Boston, MA: Addison Wesley, 2009.
