Question

2. Answer the following questions about the federal budget and debt.

a. What is the largest source of federal government revenues? Second largest?

b. What are the top four largest spending categories in the budget?

c. How large is the national debt now? Is the national debt a problem? Why or why not?

Answer 1

a. The federal budget revenue comprises of individual income tax, corporate income taxes, Payroll taxes, excise tax and other taxes. In the financial year 2018 the total federal revenue is $3.3 trillion. Out of which 49% of revenue comes from individual income tax, 7% comes from corporate income Tax, 35% from Payroll tax and 9% comes from other taxes including excise and other taxes.

The individual Income tax is the largest source of federal revenue which amounts to 49% of total revenue. The second largest source is payroll (social insurance) tax which constitutes 35% of Federal revenue.

b. The U S government spending consists of five main categories. They are            1. Health insurance, (Medicaid and Medicare), 2. Retirement benefits (social security), 3. National defense, 4. Interest on debt and 5. Others.

The total budget outlay on health insurance is accounted for 21.7% of the total budget outlay. Social security account for 23% of the total budget. Expenditure on defense is 18.8%, interest on federal debt account for 5.3% and other spending is 33.8% of the total budget outlay.

c. The federal debt exceeded $21trillion in March 2018. The federal debt expected to be $25.86 trillion by the end of the financial year 2019. The debt of federal government is the largest government debt in the world. It is approximately near to European Union of 28 member countries.

As the national debt increase a major part of federal revenue goes to interest payments. This will reduce the government investment in future and which will reduce the overall growth of the GDP. According to the latest estimates the interest will be $5.2 trillion during the coming years and interest payment will be the third largest outlay of federal budget within a decade. It will be the second largest outlay in 2046 and the single most in 2048. Thus the economy has to divert more national resources to interest payment and less will be available for the government for productive investment.

The government borrowing reduces the fund available in the capital market. This increases the interest rate and reduces the private investments. Over time the reduction in private investment and government investment slow down the growth of the economy by creating more poor with unemployment.

The increases current government makes the government inefficient to meet an emergency situation like recession, a war or natural calamities.

The increased public debt reduce the employment opportunities of U S citizens which further reduce the tax revenue and worse the economic condition more severe.