Federal Budget Deficit - Essay Example

This paper intends to discuss the significance, causes and recommendations attributed to the federal budget deficit. The federal budget deficit is significant in a number of ways. This may be either short term or long term. For instance, in a slack economy, the major effect of an increase in the deficit is stimulation of demand and consequent raise of output (The Moment of Truth, 22). It is significant to note that, as the economy approaches full employment and tightening of the credit markets, the federal government borrowing tends to push up the interest rates.

In the same regard, higher interest rates influence the cost of financing new investment in plant and equipment. More over, the federal deficit causes higher interest rates influence international capital flows and consequent effect on trade balance. In addition, the deficit causes increase in the exchange value of the dollar particularly the price of the imported products falls. The deficit also increase the size of the national debt consequently increase of the size of the annual interest payments make on the debt.

On the other and, it should be noted that not all times the deficits pose disadvantages to the populace. Running temporary deficits especially during a recession economy a federal government can enhance a weak economy and cushion the effects of the downturn on Americans. Some of the causes of the budget deficit include tax cuts. According to the experts, the tax cuts pay for themselves. This implies that, the economy expands rapidly because of the tax cuts, which produce almost the same level of revenue, as it would have in the absence of tax cuts.

This study observes that if the costs of extending the management of the tax cuts are not compensated by expenditure reductions, extending the tax cuts would somewhat decrease long-run economic expansion (The Moment of Truth, 24). On the same regard, increased domestic spending in various sectors of economy such as education, Medicare, defense (homeland security) and infrastructure is immensely attributed to the current budget deficit. For instance between 2001 and 2006, the federal budget on domestic spending account for almost 26%.

It is imperative to note that, even if the overheads of extending the tax cuts are compensated by expenditure cuts, the tax cuts would at preeminent have only small positive consequences on the economy. More over, today’s deficit is observed to have been caused by the 2001 economic downturn. The budget deficits can be reduced by cutting down expenditure on domestic spending. For instance, reduced spending on domestic programs through 2011 saw a total of $75 billion saved. In addition, tax cuts should be regulated to a lower level and more significant, strategies on reduced tax cut administration costs should structured to ensure reduced expenditure during this exercise (The Moment of Truth, 22).

This study finds out that the federal government borrowing tends to push up the interest rates, which are settled by the deficits. It is imperative to note that, deficits of such kind can be reduced by reducing government borrowing intended for the recurrent expenditure. However, this might not serve as a permanent solution in a slowly recovering economy attributed with the country’s medium and long term fiscal challenges. It is significant to note that, this is a tight economic situation, which requires stringent