BUDGET DEFICIT

Economists generally agree that high budget deficits today will reduce the growth rate of the economy in the future.

Budget Deficit

Introduction

According to the statement provided, those economists agree that high-budget deficits today will reduce the growth rate of the economy in the future. In this paper, we are verifying the statement and the questions affiliated with it. This statement is true as the budget deficit have had an immense impact on the economic conditions of the United States.

Economic Growth

The US economic recovery has stuttered in recent months as high global oil prices, stemming from supply concerns in the Middle East, have pushed gasoline (petrol) prices up sharply and cut into the household's disposable income. Among developed economies, the US is unusually oil-intensive, reflecting the relatively low taxes that apply to oil usage and heavy reliance in many parts of the country on cars. Real GDP, seasonally adjusted, grew at an annualized rate of just 1.8% in the first quarter of the year, down from 3.1% in the previous quarter. However, our US GDP forecast for 2011 remains unchanged at 2.7%. A weak first-quarter performance had already been built into our forecast, and in our view, there are reasons to believe that the slowdown will be temporary (Hao, 2011).

Private consumption growth came in at 2.7%, which was slower than the 4% recorded in the previous quarter, but the headwinds of high-gasoline prices and a harsh winter it represents a surprisingly strong performance. Gasoline prices are likely to stabilize or even fall during the remainder of this year, following a May correction in global commodity markets. Other recent data anecdotal support the interpretation that the consumer-led part of the recovery remains in reasonable shape. Retail sales rose for the tenth consecutive month in April, and consumer confidence rebounded to its second-highest level in more than three years. Job creation also appears to be accelerating. 268,000 private-sector positions were added in April who will provide a boost to households' disposable income.

Defense Spending

The government has turned its attention to closing the budget deficit, and we, therefore, expect very little growth in government consumption over the forecast period. Pressure on the budgets of state and local authorities is particularly severe. However, the 5.2% annualized fall in government consumption spending in the first quarter, which subtracted just over a full percentage point from GDP growth, was driven by a sudden decline in military spending, which is likely to prove to be an anomaly. Exports have also been a bright spot of late, and we expect net exports to make a positive contribution to GDP growth over the next few years (Mervis, 2011).

Nevertheless, the US economy is still growing slowly for this stage of a recovery, when spare capacity in the economy should allow an above-trend expansion. We retain the view that structural weaknesses are likely to cause the economy to slow as policy support is withdrawn. The US economy will continue to be held back by the poor condition of balance sheets within ...