A budget deficit is a situation where there is excessive government expenditure than the available funds for expenditure or savings. The U.S government has been realizing budget deficits each year that have seen the public debt soar. It is important that a government spend within its means to avoid increasing the budget deficit and reduce the public debt. The current budget deficit is too large that has raised debates on how to reduce it. The debt can be reduced through various measures that include tax increases with spending cuts. However, the ultimate goal should be economic growth. This is because economic growth will reduce significantly public expenditures on issues like unemployment spending while increasing tax revenue. This paper analyzes the ways in which the budget deficit can be reduced.
Options for Budget Deficit
The available options for the budget deficit reduction are several. They both achieve to do with tax increases and reduced spending. The federal government should reduce military expenditure by closing down foreign military missions such as the ones in Afghanistan and Iraq. This would reduce the military budget while reducing the deficit. The budget can also be reduced by reducing foreign aid significantly. Foreign aid should not be allowed until the government is sure that there is no deficit and the economic growth is sustainable. The increase in payroll tax will increase the tax revenue for the government, especially in the short term. However, in the long term, sustainable economic growth should help the government increase its tax revenue as it reduces expenditure (Leonhardt 3).
Social security benefits usually increase government expenditure. This time, many boomers will be retiring and will increase the government expenditure on their benefits. A reduction in their benefits especially for higher earners will help the government reduce the budget deficit significantly. Additionally, the Obama administration accepted the tax cuts that were initiated by the Bush administration to end on incomes above $250,000. This would leave other income brackets to be taxed in order to increase tax revenue (Leonhardt 3).
These recommendations on how to reduce budget deficits came from both family and friends. For instance, the recommendations to close down the military camps came from both friends and family members. Their argument was that in addition to losing family members in war, the government was spending too many resources that could help reduce the deficit while there is limited or no returns. The decision to reduce foreign aid came from the family. The argument behind the decision was that the federal government should be able to sustain the domestic economy first before giving more funds out in form of foreign aid. However, as long as the federal government is still realizing the budget deficit, there is no incentive to give out aid at the expense of the domestic budget deficit. Friends also suggested a cut in the retirement benefits for the many retiring boomers especially the high earning. This will boost the measures to reduce the budget deficit (Leonhardt 4).
The total amounts of budget deficits are not entirely on the tax increase or spending cuts. They are a mixture of the two. A balance was struck between the two because if the federal government is to reduce the budget deficit by tax increases, it will require too many tax increases in order to reduce the deficit. Additionally, if the government is to cut expenditure, the required expenditure reductions to cut the deficit will be too much that the economic growth will be affected.
Efficiency and Equality
Equality is about the decisions applying to all U.S citizens. For instance, if the government uses tax cuts, they should be applied to all U.S citizens without discrimination. Additionally, all the tax magnitude should be similar. Efficiency on the contrary is about effective use of the resources to maximize production. The decisions above are about both equality and efficiency. However, it is difficult to achieve equality and efficiency at a go. The decision on tax increase cannot be similar for every citizen. A progressive tax system should be adopted. This will see U.S citizens contributing to the budget deficit according to their income. Additionally, decisions on closing military camps are aimed at achieving efficiency (Poulson and Kaplan 6).
The potential impact of decisions on economic growth
The decision to reduce retirement benefits will affect economic growth negatively. The reduced retirement expenditures cannot be used to stimulate other economic activities that lead to economic growth. Closure of the military camps will lead to reduced military expenses leading to more funds that can reduce the budget deficit. However, the funds cannot be used for stimulating the economy further. Tax increase avail funds to the government that cannot only reduce the deficit but can be used as economic stimuli. Economic growth is an important aspect to reduce the budget deficit. As the economy grows, the government will reduce its expenditures on various elements in the economy such as unemployment expenditures. Lastly, economic growth increases tax revenue without increasing the level of taxes for citizens (Poulson and Kaplan 6).
The impact of the decisions on economic growth can be explained using the model below. Y=C+I+G+NX. The increase in the tax revenue arising from increased taxes usually has a positive effect on the government revenue. However, increased taxes will reduce the disposable income of the citizens, which will reduce the propensity to consume. This will reduce the demand in the economy rather than increase through increased public expenditures. Using tax revenue to develop infrastructure that is economically useful can stimulate economic growth through the multiplier effect. On the contrary, tax revenue that is not used economically may have no impact on the economy. Government expenditure on economically viable projects can stimulate the economy through increased demand. However, a reduction in government expenditure will reduce expenditure in economically productive projects, therefore, reducing the demand while reducing the economic growth rate. A cut on the military budget can reduce public spending while reducing demand and economic growth. This happens through a multiplier effect as shown in the figure below.
Leonhardt, David. “O.K., You Fix the Budget,” New York Times, 2010.
Poulson, Barry and Kaplan, Jules. “State Income Taxes and Economic Growth,”. Web.