Fixing the National Debt - Essay Example

Final draft Fixing USA’s Public Debt The United s of America has a public debt valued slightly above 15 trillion dollars (Brillig.com, 2011). Because the population of USA is estimated to be 311,770,570, the national public debt translates to approximately $48,000 per citizen. Since 2010, US public debt has been nearly 100 % of the gross domestic product. This ratio was 51% in 1998 (Amadeo, 2011). Therefore, U.S.A has the largest debt in the world. The public debt level needs an urgent fix and hence solutions need to be formulated to avert the impending crisis.

Effects of the High Public Debt The level of US debt has adverse effects to the economy. In the next 20 years or so, the government will be obliged to pay retirees (Amadeo, 2011). The saved funds by the retirees has however been spent by the government. This means that it will have to seek new ways of meeting its requirement. This could be done by borrowing from international governments or raising taxes. Only the latter is applicable to the current debt problem in the USA since the government’s high debt disqualifies it from obtaining finance from foreign governments.

An increase in tax has its cons. These disadvantages are likely to exceed its advantages. With the slow growth of the economy, increase taxes would result to reduced national consumption levels. Consequently, national income accounted as GDP will further reduce by a larger proportion than the tax increase due to the multiplier effect. Higher taxes will also reduce investment levels and may lead to relocation of investors to more tax-friendly nations. There will also be increased unemployment levels and in turn lower wealth and welfare to Americans.

Increase in taxes face great opposition form citizens especially through civil and social movements. The government is therefore likely to change the terms of payments of social benefits to the disadvantage of those making claims. The government could curtail social security funds to recipients of less than a certain age, say 70, or deny this benefit to individuals with high incomes (The U.S. National Debt and How It Got So Big, 2011). Although high income earners may not need social security benefits for their basic needs, they have the legal right to receive this claim.

Such actions of withholding benefit from some legal beneficiaries will lead individuals not having trust in the government, let alone the countries financial structure. Solutions to USA’s Public Debt The seriousness of USA public debt is requires immediate actions towards solving it. Among different options available to the US government include inflation. The government could induce intentional inflation the country. Many different countries have used this option to reduce value of their debt.

Such countries include Israel and Russia after it split of the Soviet Union (Rudolph, 2011). This may solve the problem but with its own consequences. Consequences include reduction in real incomes of government employees and value of terminal benefit such as social security claims. A second solution to the growing public debt may be implementing reforms in the health expenditure and social security. The above phenomenon is the greatest components in the public debt (Rudolph, 2011). Even though it is almost impossible to perform such changes in the short run, the government could use them to reduce souring expenditures in the long run.

Countries including Canada and Sweden have imposed strict social security policies that improved their long-term fiscal position. Since social security is meant to cushion the old and less economical productive citizens, abrupt changes in this scheme could be problematic if done hastily. It is not easy to reduce spending in health but with the crisis situation of the economy, this may be one of the most viable options in saving America’s financial sector. Reduction in discretionary spending is vital in reducing public debt.

This solution is quite viable since most of the debt USA has need payment in the short run. Approximately 30 per cent of the public debt must be refinanced every year. Reduction in discretionary spending will however be successful if the government sets pace in reducing discretionary spending on war so as to lead liberalists in reducing spending which is non-war. The president of United States, Mr. Obama, has advanced a solution related to this. This is to reduce non-security expenditure by stopping this spending for five years.

Reduction in discretionary spending is important in reducing the ever-growing debt-GDP ratio to below 100 % (Rudolph, 2011). Increase of revenues is necessary for the country to achieve its ambitious target to a debt ratio less that 60 per cent by 2022. Revenues can be increase by raising taxes or reducing transfer payments that are recorded as tax reliefs or interest deductions. Increase in taxes face lots of opposition from politicians and economists. However, reduction in tax reliefs and mortgage interest deductions are vital in towards ensuring a sustainable balanced or surplus budget.

Some members of the National Commission on Fiscal Responsibility and Reform had proposed to the government a 15 % upward shift in tax on gas (Rudolph, 2011). Revenues should increase to reduce reliance on debt. Conclusion The US public debt level has resulted to critique by the international community. Many nations no longer trust the financial structure of the US federal government. Lack of an immediate solution to fix public debt level could lead to deep recession for the American economy. Some of the most viable solutions to this crisis include reduction in health and social security spending, increase in revenues, reduction in discretionary spending and inflationary policies.

These solutions will lead to improved GDP-debt ratio and reduction in public debt. References Amadeo, K (2011). The U.S. National Debt and How It Got So Big. Retrieved on 1st December 2011 from http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm Brilling.com (2011). U.S. National Debt Clock. Retrieved on 1st December 2011 from http://www.brillig.com/debt_clock/ Rudolph, G. (2011). Will It Take a Crisis to Fix Fiscal Policy? Washington, DC: The Urban Institute.