Question

In your opinion, how serious is the problem of the federal budget deficit and the national debt in the United States? Incorporate a discussion of the issues surrounding deficits and the debt in your answer.

Answer 1

The actual amount of deficits isn't really the thing we should care about. We need a tax system that will raise the revenue we need to pay for the government services we want over time. And it should do so effectively — without unduly preventing jobs, saving , and investing. The non-partisan Congressional Budget Office ( CBO) estimates that federal spending will be around 21% of GDP over the next few years, while taxes will be less than 17% of GDP. That leaves an annual deficit of nearly 5 per cent of GDP — unprecedented for such a low unemployment period.

While the deficit is very high, interest rates remain extremely small for a number of reasons, including an aging American population and strong demand for U.S. assets from foreign countries. This is good news, because interest rates determine government borrowing costs. And there is every reason to think interest rates will remain low for a long time to come. As a result, for some time the United States has been able to work with large deficits.

But still very large deficits are a concern year after year — there are limits on how high the national debt can be, but it's not clear precisely what those limits are. National debt currently stands at about 80 per cent of GDP, its highest level since the post-World War II era. But the government was running surpluses at the time and the national debt was on a strong downward trajectory compared to the GDP.

With large deficits in good times and the resulting high and rising level of federal debt, we may not have the flexibility to make aggressive use of fiscal policy in the next downturn, either because politicians may be uncomfortable with large deficits when the debt is already so high, or because financial markets are concerned about our ability to get deficits on a sustainable path. If both fiscal and monetary policies are limited, then recessions will be longer and deeper than would otherwise be the case, which is enormously costly to our society.