<p>Economists generally agree that high budget deficits today will reduce the gr

Question

<p>Economists generally agree that high budget deficits today will reduce the growth rate of the economy in the future. Why? Do the reasons for the high budget deficit matter? In other words, does it matter whether the deficit is caused by lower taxes, increased defense spending, more job-training programs, and so on? In your analysis, what role do fiscal and monetary policies have to lead to higher or lower budget deficits? How do budget deficits affect overall long-term economic growth and the debt that the U.S. has to contend with? <br /><br /><br /><br /></p>

Explanation / Answer

The role of government in the U.S economy extends far beyond its activities as a regulator of specific industries or gatekeeping. The government is also responsible for managing the overall pace of economic activity, with its objective of maintaining high levels of employment and controlling price stability (inflation). It has two main tools for achieving these goals: fiscal policies, which is done through taxes and spending and monetary policies, through which it manages the supply of money. In this paper, I will discuss the why high deficits of today will reduce growth rate of the economy in the future, look at the history of our nation’s debt and deficits, different elements that causes of deficit and why the cause actually matters, what role the fiscal and monetary policies have to lead to higher or lower budget deficits and how deficits affect the overall long-term economic growth and debt of the U.S.

Let us first begin by learning the difference between the terms debt and deficit. In economics, the term deficit means a shortfall in revenue of a fiscal year. It is when the government’s revenue called receipts, which are collected taxes (payroll, corporate, excise, income and social insurance), fee revenues and tariffs that are called receipts are lower that what is spent called outlays. In other words, the federal budget deficit is the yearly amount by which spending exceeds revenue. The term debt is described as an accumulation of deficits so the national debt is the total amount of money owed by the government. It is calculated by adding all of the deficits minus the surpluses since the nation’s inception and you get the current national debt. According to Econintersect, “the estimated 2011 budget deficit is at almost $1.5 trillion, following deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010.” ¶ 1.

The U.S. Federal Budget deficit is the fiscal year difference between what the United States Government takes in from taxes and other revenues, called receipts, and the amount of money the government spends, called outlays. The items included in the deficit are considered either on budget or off budget. Generally, on-budget outlays tend to exceed on-budget receipts, while off-budget receipts tend to exceed off-budget outlays. The United States public debt, commonly called the national debt, gross federal debt or U.S. government debt, grows as the U.S. Federal Budget remains in deficit and is the amount of money owed by the United States government to creditors who hold US securities like T-bills, notes and bonds. This does not include the money owed by states, corporations, or individuals, nor does it include the money owed to Social Security beneficiaries in the future.

As of April 18th, 2006, the total U.S. government debt was $8.395724 trillion. The United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly reported value of $75,463,476.52 on January 1, 1791. Over the following 45 years, the debt grew and then contracted to nearly zero in late 1834. On January 1, 1835, the national debt was only $33,733.05, but it quickly grew into the millions again. The first dramatic growth spurt of the debt occurred because of the Civil War. The debt was just $65 million dollars in 1860, but passed $1 billion in 1863 and had reached $2.7 billion following the war. The debt slowly fluctuated for the rest of the century, finally growing steadily in the 1910s and early 1920s to roughly $22 billion as the country paid for involvement in World War I.

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