Budget Deficit and U.S Economy

Budget Deficit and U.S Economy

Introduction

The budget deficit is the most alarming problem at economic forefront of U.S. The U.S

budget deficit refers to the difference between the governmental revenues and expenditures with paying no concentration to intra-governmental transfers (Aaron, 2010). According to the report of CBO, the U.S budget deficit would exceed $1 trillion and the fiscal recession would confront U.S economy with notable threats (Evans, 1998). The unsustainable budget deficit in the long run has hampered the economic progression of US because the long prevalence of a budget deficit substantially contribute to the national debt, elevating the cost of interest rates and increasing burden on Governmental resources. The economists and political parties have been debating on the most immediate and effective solution to the looming economic disaster but the ultimate Governmental maneuvers in this regard have not still addressed the problem of budget deficit with great deal of responsibility and proactive approach.

Background of U.S Budget Deficit

The roots of the current budget deficit can be found in the large and consistent deficits of the 1970s. The average deficit from 1971 to 2007 has been 2.5 percent of GDP (Aaron, 2010). The Government of Bush claimed that their budget proposal would rectify the deficit issues by the year 2012 but still the budget deficit is unresolved (Kara, 2011). The government's attempts to moderate the implications of the financial catastrophe lead to huge deficits in 9.9% of GDP in 2009 and 8.9 percent of GDP in 2010(VanDenburgh, 2012).

The public debt related with GDP increased on a swift note in 1980s. The economic

policies of President Ronald Reagan curbed tax rates and enhances military expenditures but Congressional democrats discontinued endeavors to reverse spending on social activities (Vietor & Weinzierl, 2012). This resulted in increase in debt from 26 % to 40 % over the period from 1980 to 1988 and continued to increase in the 21st century (Kliesen & Thornton, 2012). During the rule of George W. bush, public debt rose from $3,339 billion in 2011 to $6,369 billion in 2008(VanDenburgh, 2012). As the consequences of the Global financial crisis, the debt held by public reached to $11.12 trillion under the presidency of Barack Obama by the end of July 2012(Kliesen & Thornton, 2012).

Percent of Potential GDP

2

1

0

-1

-2

-3

-4

-5

-6

-7

-8

196219681974198019861992199820042010- Fiscal Years

The U.S Cyclically Adjusted Budget Deficit

The Progress of U.S Government in Reducing Deficit

The U.S Government has extensively reduced the potential deficit for the budget of fiscal year 2013 but the current goal setting does not seem sufficient to eliminate the deficit in coming years. The Office of Management and Budget (OMB) predicts a deficit of at least $600 billion annually till the FY 2020 which is significantly higher than the budget of last year which was forecasted as $500 billion annually through 2020(Vietor & Weinzierl, 2012). The U.S needed increased expenditures to drive economy out of economic depression, smoothly shut down the wars in Afghanistan and Iraq and compensate for mandated privileges (Kara, 2011). It may be required this year ...