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US rising debt level and current economic problems - Essay Example

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A budget deficit exists where the total government expenditure exceeds the revenue of the government. Government deficit means that the excess money needed to finance the government budget will have to be borrowed from other countries or be financed from donations…
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US rising debt level and current economic problems
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US rising debt level and current economic problems

Download file to see previous pages... According to the forecast of the organisation for economic cooperation and development (2011), the budget deficit for US is likely to increase to 10% of the GDP. This projection means that the US government must formulate ways of arresting the looming economic crises as a result of the increasing deficits. The main reason why the public debt in America would increase is the need for the government to increase job opportunities by stimulating demand (Saad 2011). When a government intends to create more jobs, it will increase the level of demand by increasing its public expenditure and reducing the level of taxation. This had made the Obama’s government increase the level of public debt. At the same time, the 2008 economic recession could also be a reason for the increased budget deficit. After a recession, the economy of a country needs to be stimulated to increase the level of demand and to create more economic activities. This made the US government increased their level of budget deficit to increase the rate of recovery of the domestic economy (Amadeo 2011). The increased expenditure from external borrowing accompanied by a decline in the level of taxation must result in an increase in the level of public debt. If not closely monitored, the increased public expenditure will result in increasing level of inflation making prices of goods soar in the market. The increased cost in recapitalization and acquisition of financial institutions as well made the public deficit soar (Turner 2008). One of the causes of the economic recession was failure by the financial institutions to act decisively to rescue the depreciation in the economy. The failure by the credit rating agencies to give true credit risks made banks increase their mortgage loans that in the long run led to the recession. The US government as a result of this ventured into takeover of some banks which therefore meant increase in government spending making the economy experience a rising level of deficit (Saad 2011). The increases government spending accompanied by the declining tax rates was bound to increase the level of debt and this makes the projections of OCED realistic and important for government formulation. It must also be noted that the increasing deficit has made the democrats and republicans have clashes on the measures that the government should undertake to help reduce the level of deficit and the general debt level (Saad 2011). The two parties have agreed collectively on the short term measures of a cut in the government spending but have failed to agree on which areas that the governments should reduce spending. They also have different thoughts on the long term remedial. To correct the economic problems in the economy, the government can pursue a significant reduction in the deficit level. The US government through such a move would be in a position to reduce their increasing debt level and at the same time solve other economic challenges. A reduction in the level of budget deficit can be made for various purposes; the first reason for a reduced budget deficit would be to help reduce the level of government debt (International Monetary Fund 2010). For instance, the Obama administration projects that through the reduction in the government deficit for a decade would make the government solve the high level of debt (OECD 2011). Another reason for cutting the level of government deficit would be ...Download file to see next pagesRead More
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