U.S. National Debt and a Fiscal Plan to Fix Deficit 6.2 Trillion - Literature review Example

? U.S. National Debt and a Fiscal Plan to Fix Deficit 6.2 Trillion Background and significance The U.S. national debt refers to the debts that the Federal government owes, which is close to sixteen trillion dollars at present (Paletta, 2012). The debt is in two forms. The first form is the debt that the citizens owe to the government. This category also comprises of foreign investors, foreign governments and businesses who bought notes, bonds and treasury bills in the United States. Understanding the debt has much significance to the Federal government as well as the residents of the United States. The debt implies that a large percentage of the total GDP of the United States falls under public debt, which hinders economic growth. It also leads to other economic hazards like unemployment and dependence on the employed people in the society. The government will also lose potential investors because they will lack confidence in the sustainability of economic growth. Various presidents have tried to adjust the debt by applying various fiscal and monetary policies (see table 1). Factors that contributed to the problem Accumulation of the debt has a historical as well as economic significance. Historically, wars between the U.S. and other nations are the main cause of the rise in the debt. For instance, the second world war of 1945 is believed to have the greatest contribution to increase in the national debt. According to treasury, the debt rose by close to 115% during this war. However, the debt reduced for the following thirty years until the past ten years when the trend reversed (Treasury Direct, 2012). The economic perspective highlights fiscal government policies as the main push factor of the increase in the debt. There have been concerns about the weakness of various fiscal policies of the Federal Government in addressing long-term economic issues. Fiscal policies are the ones that look at the way the government spends its money as well as sources of government revenue. It is clear that, in the recent years, the U.S. budget has always been a deficit budget. A deficit budget implies that the government spending outweighs the tax revenue. Many presidents of the United States share the view that reduction in taxes is the main factor leading to the accumulation of the debt. This became evident especially after the current President initiated efforts to help the government in collecting more tax revenue than in the previous years. Fiscal Plan to decrease the national debt The main aim of the U.S. government should be to increase the tax revenue that it generates from the economy. The best approach to achieve this through the application of a progressive tax system. This system allows the government to tax more on high-income earners than it taxes the low-income earners. This will help in increasing the tax revenue and it will ease the burden of low-income earners. The amount that low-income earners have for consumption and savings will increase if the government reduces the taxes of low-income earners (United States Government Accountability Office, 2012). This will increase the national output through the GDP equation. The other possible fiscal policy is the reduction of government spending. The government spends large amounts of money in financing the military as well as the social and health security of the citizens (Lee, 2012). The best way to reduce spending in the health sector is through improving the safety and prevention measures so that the amount the government needs for Medicare and drugs can decrease. This fiscal plan targets reducing the amount that the United States spends in the health and defense sectors. This is because the two sectors account for the majority of the money that the government spends. However, reducing government spending implies that the GDP of the country will decrease with time. This brings in other problems of unemployment and eventually inflation. This fiscal plan offers the Federal Government a good opportunity of reducing the debt and striking a desired level of inflation and unemployment just as the Phillip’s curve suggests. The Phillip’s curve The Phillip’s curve is a graphical representation of the relationship between inflation and unemployment. The curve indicates that there is an inverse relationship between the rate of inflation and the rate of unemployment. That is, the higher the rate of unemployment the lower the rate of inflation. However, it is not possible to have zero levels of both inflation and unemployment (see figure 1). A good fiscal plan should bring an optimum level of inflation and unemployment. However, Keynesian theories of economics have different propositions with the Phillip’s Curve. Keynesian theories argue that the rate of employment in the economy is a factor of the level of the national income. The relationship is such that lower the national income, the lower the rate of employment and vice versa. The fiscal plan targets increasing tax revenue, which implies that the national income will increase thereby increasing the rate of employment. This fiscal plan targets Treasury Bills in the money market. Treasury Bills give the best alternative of increasing the amount that the government has on its disposal. They are short-term forms of securities that the government sells to the public. A great proportion of the U.S. national debt falls under money that the public owes to the government for treasury bills. China is one of the economies that finance their budget using treasury bills. China owes the U.S. large debts through purchase of treasury bills. The Federal Government, through the appropriate finance channels, should increase the amount that the government spends in buying bonds from investors and the public. Consequently, the government should invest in buying more treasury bills from investors and the public. The government will have less amount of money to spend than it was before implementation of the fiscal plan, which is among the ways of reducing the debt. Summary and conclusion The U.S. national debt poses a number of risks to the country’s economy. Table 1 shows an increasing trend of the debt over the last period of ten years due to deficit budgeting. The government should apply the fiscal plan above to help in reducing the debt. The best way of reducing the debt is through increasing revenue that the government collects from the citizens. This is possible through applying tax reforms as well as cutting government spending. However, such policies bring about other issues of unemployment and inflation as presented in the Phillip’s Curve. It is also possible to raise government revenue without increasing taxes. Treasury bills are the best tools of increasing government revenue without increasing taxes. Therefore, it is possible for the Federal Government to reduce the national debt through application of the above fiscal policies. Charts and Figures Table 1 (CONGRESSIONAL BUDGET OFFICE, 2012) YEAR OUTSTANDING DEBT 2010 13,561,623,030,891.79 2009 11,909,829,003,511.75 2008 10,024,724,896,912.49 2007 9,007,653,372,262.48 2006 8,506,973,899,215.23 2005 7,932,709,661,723.50 2004 7,379,052,696,330.32 2003 6,783,231,062,743.62 2002 6,228,235,965,597.16 2001 5,807,463,412,200.06 2000 5,674,178,209,886.86 Figure 1 (Hoover, 2010) References CONGRESSIONAL BUDGET OFFICE. (2012). Choices for Deficit Reduction. Retrieved at 26 November 26, 2012 at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43692-DeficitReduction_print.pdf Hoover, K. (2010). Phillips Curve. Retrieved on 26 November 2012 at http://www.econlib.org/library/Enc/PhillipsCurve.html Lee, C. (2012). How does President Obama plan to fix the federal deficit? Retrieved on 26 November 2012 at http://money.howstuffworks.com/obama-reduce-deficit1.htm Office of Management and Budget. (2012). Eliminating Billions in Payment Errors. Retrieved on 26 November, 2012 at http://www.whitehouse.gov/omb/blog Paletta, D. (2012). U.S. Debt Now Exceeds $16 Trillion. Retrieved on 26 November 2012 at http://blogs.wsj.com/washwire/2012/09/04/u-s-debt-now-exceeds-16-trillion/ Treasury Direct. (2012). Historical Debt Outstanding - Annual 2000 – 2010. Retrieved on 26 November, 2012 at http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm United States Government Accountability Office. (2012). Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus. Retrieved at 26 November, 2012 at http://www.gao.gov/assets/650/647988.pdf Read More