Commitment Deficit as a Projection by Politicians, Rather than as a True Reflection of Australia - Essay Example

?Deficit The federal government has enormous role in capital budgets. The government functions are as methods of fiscal law or policy in order to enhance the governments’ net worth especially in the field of economic infrastructure as drivers for economic development. Therefore, it is significant for the government institutions to describe the actual balance between capital and current expenditures. Government institutions or entities generate money via public debt, taxes, intergovernmental transfers, and diverse businesses that the government own such as colleges, schools, and universities1. There is the possibility of reorganizing or refunding debts of the federal government. In order to take these steps, there needs to be evaluation and assessment of refunding or reorganization of debts. A good way that the federal government could reorganize or refund its debts obligation is whereby the city’s administrators highlight upon the debts with high interest rates. These types of debts can hamper the government’s ability to perform other financial duties or obligations. Therefore, refunding would imply that the government would add new debt to the existing debt kitty. In turn, the government would be forced to increase debt in order to facilitate payments of both interest and the existing debts. If the government’s new debt can be increased at high interest rate, this would offer economic prosperity and other possible benefits may be realized in case the interest rates decrease such as transforming the conditions of the debt that may permit the local government of Seattle to revise their payment plan that may assist with short-term budget demands2. Refunding debts to substitute a lower interest rate may poses some economic merits, if other transformations are made, like term, there is a probability that there will be a net rise in the debt costs over the debt’s term3. Furthermore, another refunding or reorganization tactic is the reduction of the overall expenditures gained by the government. This would establish an additional financial base that should be diverted towards settling the city’s debts4. In order for the federal government to decrease the high debts, it is vital that alternative funding options are created in order to support its debt obligation. The federal government may provide financial help in quarterly or annual terms. Another alternative is for the city to try to maximize revenues gathered. It is true that a budget is an itemized summary of intended expenditures of a certain period with proposals for financing them. Further, I concur that budget deficit are inevitable because of spending usually outweighs income. This in turn makes the government to increase taxes, raise debt ceilings, consolidate public debt, and decrease spending. In order to avoid spending, it is rational to include major budget cuts in departments such as The Executive Office of the President, Department of Housing and Urban Development, Department of State and Department of Treasury and department of Defense. Government is spending more than it is bringing in. This practice usually plunge it in financial crisis. As we can see, debt can only ruin you, whether it is in your household, city, or nation. In addition, in order to avoid debts or bankruptcy, we make sure to pay our credit cards and we really try not to take out loans for school and vehicles. If an individual were to run a deficit on his or her household that implies that, an individual is spending more than he or she is making. Consequences for this would be bankruptcy, credit destroyed, and our house and vehicles could be taken away. It is significant to note that in order to avoid debts or bankruptcy it is rational to introduce budget cuts in every department, as this will reduce spending5. Policies, which are commonly considered for reducing a current account deficit 1. Devaluation This is where the value of the currency against other currencies is reduced. When this is utilized, there is an increase in the price of imported items, which will in turn decrease the demand for imports. At the same time, exports will become less expensive which will increase the demand for the exports. If it is assumed that the demand is relatively price “elastic,” it would be expected for a devaluation to improve the current account balance. However, it should be noted that the elasticity of demand for both exports and imports would be the prime determinate of whether this would improve that balance. 2. Deflation This is where the government reduces the aggregate demand by raising interest rates and/or by increasing taxes. This would result in the people having less money to spend, which in turn reduces the purchases of imports. Using deflation would also encourage manufacturers to reduce their costs, which will lead to being having exports that are more competitive6. This will increase the demand for exports. However, this can conflict with other objectives. When there is lower Aggregate Demand, growth could fall causing a higher amount of unemployment. Governments usually would reject risking higher unemployment just for the reduction of a current account deficit7. 3. Supply Side Policies This can bring about improvements in the economy’s competitiveness. It can also assist exports in being more attractive. It can improve the current account balance, but this could take some time in order to see the desired results. 4. Protectionism This is where increasing tariffs of quotas is used to reduce the amount of imports and improve the current account balance. However, this can often cause retaliation so that exports decrease. In addition, it can lead to domestic industries becoming uncompetitive due to lack of incentive. Increasing the competitiveness of the country by decreasing prices and increasing quality in turn increases exports and reduces imports, which in turn reduces the trade deficit. Utilizing contractionary monetary and fiscal policies can result in reduced inflationary rates, which can increase the competitiveness of exports globally8. However, because this can reduce the employment level, it might best be used as a combination of contractionary fiscal policy and expansionary monetary policy. This policy combination should reduce interest rates while maintaining the employment level. Trade restrictions should result in improvements to the current account balance. However, this could also result in a reduction of the standard of living. Further, this does not increase the competitiveness of exports in the global market. In addition, the possibility of retaliation is far too high9. Manufacturing has been at the heart of the U.S. trade deficit for years. There is a deficit in manufacturing which has paralleled the trade deficit since 1967. Throughout that time, the manufacturing deficit has been roughly the same as the current account deficit. It would stand to reason that if the U.S. wished to reduce or eliminate the current account deficit, that there should be extreme attention paid to manufacturing10. Manufacturing industries would need to increase exports and those goods, which are import competitive for the current account balance to improve. To eradicate the current account deficit, it would require a minimum of a 30 percent increase of U.S. manufacturing output. In conclusion, the evaluation of the process of debt capacity determination has shown that in order to get the debt capacity of a state, it is important to look at the most essential factors, which include value of property, population, and income. Refunding or reorganization of the existing debt obligation could decrease the overall debt of the government. Bibliography Alesina Aurther, Europe and the Euro. Chicago, IL: University of Chicago Press, 2010. Coe Nool, The economic geography of the UK. London: Sage Publications, 2010. EW World Economy Team (2013) UK Economic Structure. Retrieved from: http://www.economywatch.com/world_economy/united-kingdom/structure-of- economy.html. Lee Reese. Public budgeting systems, Ontario: Jones & Bartlett Publishers, 2008. Pettinger Timothy Policies to reduce a current account deficit. Retrieved November 19, 2013 from http://www.economicshelp.org/macroeconomics/bop/policies-to-reduce-deficit/ Shmelev Sylvia, Ecological economics: Sustainability in practice. Dordrecht: Springer, 2013. Scott, Richard. Manufacturing Key to Reducing Trade Deficit. Retrieved November 19 2013 from http://www.epi.org/publications/webfeatures_snapshots_ archive_01312001/ Shapiro Allen. Capital budgeting and investment analysis, New York, NY: Prentice Hall, 2004. Seitz Nelson and Ellison, Michael. Capital budgeting and long-term financing decisions, New York, NY: Kindle Books, 2004. Read More