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Budget Deficits And Government Debt Essay

1158 words - 5 pages

Our country has
Budget deficits and government debt have significantly increased in many countries around the globe over the past 20 years, and almost all these countries are now faced with the challenge of building back up, their economy. The current problem of budget deficits and public debt has come about mainly because the growth in government spending has exceeded the growth of goods and services. “While the average ratio of tax revenue to GDP in industrial countries increased from 28 percent in 1960 to 44 percent in 1994, the corresponding ratio for government expenditures rose from 28 percent to 50 percent.” (McDermott & Wescott, 1997). Given the high levels to which taxes have ...view middle of the document...

As stated above budget deficits can potentially be a sign that the economy is growing and flourishing. But, if deficits become too grate the economy will back slide into recession and possibly a depression as we have seen in the past. The Fed will continue to try to stimulate the economy and purchase securities and infuse more money into the economy reducing interest rates and encouraging loans, mortgage, and other business spending.
The economic growth rate will be stunted once the government doesn’t have the funding to support low interest rates and low taxes. When policies are implemented to help reduce the deficit overall spending will be reduced. Once spending is reduced to a point of extremely low output growth, economic growth becomes stagnate. The government introduces higher taxes on businesses and individual households; because of this output is cut along with wages, and manning. Business and individual households reduce overall spending in order to maintain a certain level of financial stability, at the same time the economy is no longer stimulated, and like a climbing airplane eventually stalls and begins to fall.
Many people may think that there are many different aspects that contribute to the national deficit and to a point they may be right. Why are we currently in the position we are in as a country? When President Clinton handed the administration over to the Bush administration the national deficit was around $6 trillion, since then the deficit has sky rocketed to an astounding $14 trillion (Bloch, 2011). Since the Clinton administration we have had multiple wars that have taken a toll on our spending. In 2008 even more unfunded spending came about with stimulus incentives and multiple big business bailouts. We then begin to see other deficit inducing trends such as lump-sum tax cut to stimulate economic expansion followed a sudden lump-sum tax increase to help relieve the national debt (Gale, William, & Orszag, 2004) We can see this when there are timing problems in monetary and fiscal policy. There is always a desire to stabilize the economy and maintain a balance.
Policy makers implement economic contraction and expansion based on which way the economy is headed. Some may use budget balancing techniques, whether or not it is stabilizing or destabilizing for some states to balance their budgets I believe is dependent on the shape of the economy at that time. For example, if all...

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