Main Reasons of Crisis and The Moment of Truth - Coursework Example

Affiliation: The Moment of Truth Part General reasons for the debt crisis The first reason for the debt crisis results from the unsustainable fiscal path that America faces. Issues of rising spending and revenues falling short contributes to uncertainty, thus subjecting the government into borrowing huge sums of cash on yearly basis for making up the difference. For example in 2010 alone, the federal spending consumed nearly 24% of the Gross Domestic Product (GDP), which equaled value of goods and services produced in the economy. The only time this somewhat excessive spending occurred was during the World War II. The tax revenues were able to stand at 15% of the GDP in 2010, which was the lowest level since 1950. Therefore, the existing gap between spending and revenue, representing the budget deficit, was exactly under the 9% of the GDP. Another reason contributing to the debt crisis is the increased expenditures on wars and the slew fiscally irresponsible policies, accompanied by the deep economic downtime. In this case, the nation has arrived at ‘moment of truth’ of which it is not even justified to blame the political party. There are expectations that the economy will help towards improving on the deficit situation in the short run basing on the fact that revenues will rise upon people going back to work. In this case, money that is subject to spend on the social safety net will most likely decline since fewer people will be forced into relying on it. Even though the economy might recover, projections indicate that the federal spending will most likely increase faster than the revenues. In this case, the government will have no other option but to continue borrowing money for expenditure. Another factor contributing to the debt crisis is the cost of healthcare. All of it results from the retirement of baby boomers over long run, contributing to the continuous growth of the health care costs. Projections indicate that by 2025, the revenue generated will only be able to finance on the interest payments, Medicare, Medicaid, and Social Security. All other federal government activities, starting from the national defense and the homeland security, extending to the transport and energy sector will have to rely on the borrowed money when doing payments for services. At this time, debt of which the public will be outstripping the entire America economy, expected to grow to over 185% of the GDP by the projected period of 2035. Similarly, projections indicate that interest on debt will rise to reach nearly $1 trillion by 2020. Encountering these mandatory payments, of which do not buy goods or services, will end up squeezing out on the funding of all other priorities. Another reasons contributing to the debt crisis is that the federal debt remains unsustainable by itself. The level of unsustainable debt ends up driving up on the interest rates of all borrowers, be it businesses and individuals, thus curtailing on economic growth by crowding out on the private investment. As it becomes more expensive for the entrepreneurs and the businesses into raising capital, participate in innovation and creation of jobs, the rising dept could end up reducing on the per-capita GDP. It thus implies that the share of nations’ economy by each American will increase by as much as 15% come 2035. Such issues of rising debt will also end up hamstringing the government, thus depriving it on the resources required for responding to the expected future crises and depriving on the possibility of investing in other priorities. Deficit spending is commonly in use at responding on the short-term financial ‘emergency’ needs, but as the national debt keeps on growing, the federal government will encounter difficulty in borrowing funds through affordable interest rate, thus preventing on the effectiveness of responding to emergencies. Part 2: Overview of the proposed solutions offered by the authors The main agenda of the proposed solutions is to bring the budget back to the primary balance (balance that include interest costs) by 2015, and be able to meaningfully improve on the long-run fiscal outlook. The recommendations offered by the authors are able to accomplish on these goals, while keeping on mind a number of key principles. Some of the principles include making America better for tomorrow, avoiding any disruption on the fragile economic recovery, protecting on the truly disadvantaged, cutting on spending that are hard to afford, among other principles. In this regard, the authors of this report were able to propose the six-part plan that would help in putting the nation back to the fiscal health, promoting economic growth, and protecting on the vulnerability of America. When taken as a whole, expectations are that the plan will; Be able to achieve nearly a $4 trillion deficit reduction by 2020, which will be more than any other effort in the entire history of the nation. Be able to reduce on the deficit to 2.3% of the GDP by 2015, which will exceed on the President’s goal of achieving a primary balance of about 3% of the GDP. Be able to sharply reduce on the tax rates, and then abolish the AMT, and achieving cut on the backdoor spending in the tax code. Be able to cap revenue at 21% of the GDP and achieve a spending that is below 22% and eventually reach 21%. Be able to ensure on the lasting Social Security solvency, followed by preventing on the projected 22% cuts when it reaches 2037, achieve reduction on elderly poverty, and distribute on the burden fairly. Be able to stabilize on debt by 2014 and see a reduction on debt to 60% of GDP by 2023, and a further 40% by 2035 (The Moment of Truth Report 15). As the proposed strategies of solving the debt crises, the plan proposed by the authors has the following six major components; 1) Discretionary Spending Cuts – the plan here is to enact some tough discretionary spending caps that will force maximum budget discipline in Congress. The components includes enforcement mechanisms that provides the limits real teeth, followed by making significant cuts to the security and non-security spending through cutting on the low-priority programs and streamlining on the operations of the government. 2) Comprehensive Tax Reform – the plan here is to have a sharp reduction on the rates, broaden on the base, simplify on the tax code, and see a reduction on the deficit through reducing on the many ‘tax expenditures.’ It is also apparent to introduce reforms on the corporate taxes as way of making America become more competitive, and cap on the revenue to avoid on the excessive taxation. 3) Health Care Cost Containment – the plan here is to replace the phantom savings from the initially scheduled Medicare reimbursement cuts that have the likelihood of never materializing. Basing from the new long-term care program, the common sense reforms to the physician payments, cost sharing, then the malpractice law, the prescription drug costs, the government-subsidized medical education, together with other sources. There will be need to institute the additional long-term measures that will be able to bring down the spending growth. 4) Mandatory Savings – the plan here is to cut on the agriculture subsidies and modernize on the military and civil service retirement systems. The same time will see the introduction of reforms in the student loan programs, followed by putting the Pension Benefit Guarantee Corporation on to a sustainable path. 5) Introducing Social Security Reforms that would Ensure Long-Term Solvency and see a Reduction on Poverty – the plan here is to ensure there is a sustainable solvency for the next 75 years, while at the same time reducing poverty among the seniors. 6) Process Changes – the plan here is to introduce reforms on the budget process as a measure of ensuring that the debt will remain on a stable path. Another expectation is that spending will remain in control, with inflation measured accurately, while the dollars of the taxpayers go to where they should belong. Part 3: Arguments on why some of these solutions will work In an individual opinion, I think most of the proposed solutions have the likelihood of working well as planned, but others would fail due to the difficulties surrounding those specific areas. The first solution of disciplinary spending cuts would work in that it is possible to tell and contain areas of unnecessary spending. It is possible to make the Congress follow maximum discipline on the expenditure of federal funds through ensuring maximum accountability and transparency in the expenses. The second solution of introducing comprehensive tax reforms would also work. This is because it is the area contributing to the accumulation of debts. Finding a permanent solution that would see a standardization or reduction on loan rates and simplifying the tax code would directly contribute to the reduction of debt crises. I think the third solution of health care cost containment would not work. This is because health care is the most dynamic region with many arising complexities. It is hard to monitor and regulate the entire health care sector without having room for major adjustments. Mandatory saving is another plan that I think would not work. This is because there is no guarantee of achieving an effective balance after introducing agricultural subsidies and modernizing on the military and civil service retirement systems. Looking at the fifth solution of introducing social security reforms, I highly think this plan would work in that it is an effective strategy of achieving long-term solutions to issues of poverty. Early plans and changes through reforms always end up offering permanent and reliable solutions to future problems. Finally, I think the last solution of process changes is another area that will work in solving the debt crises. This is because introducing reforms in the entire budgetary process will end up saving on the unnecessary expenses, which will directly reduce on the debts that the nation has to deal with in its daily operations. Works Cited The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform., 2010. Read More