Table of Contents
Budgets are decision packages. In the past, executive reformers have aspired to avoid the financial laxity that frequently results from incoherent decision making in economic issues. They do this while on the hand encouraging the principles of the comprehensiveness and the accord of the budget (Tarschys, 2009). The U.S. federal budget is on an unsustainable way because there is lack of major policy changes. In addition, there is an anticipation that the federal government arrears may sum to around $5 trillion over the next ten years. Such arrears will trigger a major rise in the U.S. government debt, in relation to GDP. The risk of serious difficult results is likely to arise because the level of the nation's high budgetary imbalances is currently so big even though it is not possible to foretell when such effects may happen (Rubin. et al, 2004).
In the 1960s and 1970s, balancing the budget was not as significant as balancing the economy. This message was especially significant in the spending departments. Many nations' governments presently appear to be fumbling for some synthetic norm to restore the dethroned model of balance between income and expenses. Inflicting strong restrictions on all performers is the main aim of such a model to strengthen budgetary discipline. The norm's direct duty is perhaps to consign the governmental system itself to budgetary severity but it also does other significant roles such as a confidence-building sign to the international and domestic environment (Tarschys, 2009).
Implications of balancing the budget
Reducing expenses and rising revenue is essential when a budget is in arrears. Both can cause pain and are hard to attain politically. Nevertheless, deficits do not happen by accident. A majority of Congress enacts spending programs because they consider the activities they hold up to be compulsory or in any case desirable. Short-term crisis sometimes validate public subsidies to commercial activities, which are likely to postpone required changes to economic and technological change. This leads to misallocation of resources and eventually lowering a level of living. Elimination of public funding to commercial activities from the federal budget would lower the deficit and would probably raise the economic growth (Haskins. et al, n.d).
Deficit reduction, whether caused by reducing spending or increasing tax, assist the economy by opening up resources either for exports or for investment. This opening up of resources can be helpful in the end for the economy since more investment should bring about higher productivity and faster salary growth. Eventually, higher exports are advantageous because they cut down the foreign debt hence there will be paying out of interest to aliens in the future. However, the short-term effect of deficit reduction is not beneficial to the economy. Either reducing government expenditures or raising taxes or both would lower the deficit. Eventually, these strategies are obviously contractionary for they lead to reduction of economic growth, more unemployment and less job creation (Baker, 1993).
According to conventional analyses of sustained budget deficits, there are negative consequences of deficits on lasting economic growth. Continuous budget deficits reduce national saving according to conventional view, but augment borrowing from overseas and cut domestic investment. The interest rates greatly affect the changes in the economy. Domestic interest rates reduce investment and draw capital from abroad reducing the national savings. The cut in domestic investment reduces productivity growth and augment the current account deficit, both lowering the future national income consequently losing the ultimate income growing. In addition, the conventional view asserts that the costs imposed by maintained deficits tend to build steadily over time, rather than occurring suddenly (Rubin. et al, 2004).
In the case of reduction in spending, the government fire its workers hence force them to look for new employment. The government's suppliers, for example tanks or schoolbooks, also suspend workers when the government lowers its spending for their merchandises. In addition, a secondary consequence emanates from the reduction in utilization from the workers that lose their tasks. Workers also reduce spending after being suspended. Their spending patterns change causing a decrease in the demand for goods for instance computers, clothes, and cars. The manufacturers of these goods also dismiss workers due to the shrinking market demand. There is a lowered amount of money meant for spending because of the high taxes making individuals reduce their expenditure. This causes more dismissals, which again have the same secondary multiplier consequence (Baker, 1993).
There is an understandable reluctance among the politicians and voters to cut social security, Medicare, or Medicaid benefits because low-income people, disabled, and elderly, rely heavily on these programs. Furthermore, it seems unjust to cut allowances for those eligible to retire in the near future or present retirees, who have premeditated their retirement on the anticipation of getting these gains. However, governments should establish modification on retirement programs to prevent their using of the federal budget though only some elected officials are prepared to say so (Haskins. et al, n.d). Politically, it is less likely to restraint in the wishes of other constituencies to obtain augments in spending programs while granting large tax cuts to some groups.
This means that restraints on both expenditure increases and tax cuts are essential to make an environment of economic discipline. For instance, in spite of large tax cuts the interest groups adversely affected by spending restraints are less likely to acknowledge such restraints. Stopping fiscal discipline on one side of the budget causes a time of fiscal irresponsibility on both sides of the budget. Consequently, it is even not clear whether tax reductions inflict more or less restraint on expenditure augments, shunning enough restraint on expenditure to counteract the cost of the tax reduction itself (Rubin. et al, 2004).
Reduced interest rates might spare the economy the twinge of debit reduction. This will trigger augments in investment and the need for exports. A reduced deficit causes reduced government borrowing leading to a general reduced demand for borrowing in addition to firing workers. This leads to fall of interest rates, making it economical for companies and persons in the private sector to borrow. This might cause companies to augment investment and make persons more prone to purchase homes or borrow to fund other spending expenses (Baker, 1993). It is easy for politicians to advocate for reduced revenue and increased spending. Voters who will profit from these acts are often keen to make their desires acknowledged although the pressure is hard for politicians to endure. Elected leaders who wish to shun deficit expenditure and believe in financial discipline can profit from inflicting rules on themselves. These rules will oblige them to deem the deficit effects of their votes (Haskins. et al, n.d).
The United States Government needs to initiate considerable changes in financial policy to guarantee healthy long-term U.S. financial performance. These changes will deal substantially with the dangers emanating from constant huge budget deficits and the financial unevenness they involve. Failing to do something faster increases the likelihood of economic and financial disorder at some point in the future. Moreover, it runs the danger of further restraining policy suppleness in the future. Although inflation is not a reasonable lasting approach for handling unrelenting budget deficits, a policy of advanced inflation might lessen the definite value of the government's debt. For instance, if the government constantly prints money to fund the deficit, the condition would ultimately cause hyperinflation. Reclaiming integrity in financial markets becomes very hard once a government has lost it (Rubin. et al, 2004).
There should be a substantial balance between balancing the budget and growing the economy. Both are ample strategies for reducing the government deficit although the present diverse implications. In particular, most governments endeavor to balance the budget through applying diverse measures. These measures include reduced interest rates, reducing the number of employees and reductions in spending. Budget procedure restructuring should engage at least three basic aspects. First, limits on optional expenditure should expand for ten years to deject pushing costs into the future.
Secondly, tax reductions and privilege increases should not seem less costly in the long term. Thirdly, there should be strict definition of disaster expenditure. In this line, there should be budget for emergency funds to deal with recurring disasters, for instance flooding and forest fires. Tragedy appropriations need supermajority votes unless they involve tax or expenditure measures that counterbalance their cost.