Question

1.

Based on the attached article that was written by Deirdre Shesgreen of the USA Today, dated April 9, 2018, respond to the following questions: a) Distinguish between debt and deficit. b) Discuss the relationship between deficits and the debt, i.e., how does one effect the other. c) According to the head of the Peter G. Peterson Foundation, “the debt would hit its highest level since World War II in 10 years, crowding out private investment and reducing the government's flexibility to respond to downturns.” Explain how debt can crowd out private investment and reduce the government’s flexibility to respond to downturns. d) Is interest on the debt mandatory spending as part of the federal budget? e) A balanced budget amendment is a constitutional rule requiring that a government cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government. Cite and briefly discuss the pros and cons of a balanced budget amendment. f) What is the Congressional Budget Office and what is their purpose? Federal Deficits Projected to Rise, Surpassing $1 trillion in 2020 The nation’s annual federal deficit will grow “rapidly” over the next four years and will exceed $1 trillion by 2020, the nonpartisan Congressional Budget Office said Monday. The deficit will hit $804 billion this year, a 21% increase over 2017, and will continue to grow through 2022 — hitting historically high levels and adding to the national debt. The changes are a result of lower revenues, stemming from the Republican-crafted tax cut law enacted in December, and increased spending from the bipartisan budget agreement Congress passed earlier this year. The budget deficit will be 4.2% of the nation’s gross domestic product in 2018, and will grow to 5.1% in 2022, the CBO estimates.  “The only time since World War II when the average deficit has been so large over so many years was after the 2007–2009 recession,” the budget office noted.    Democrats seized on the report to blast the GOP tax law and portray Republicans as fiscally irresponsible. The tax law is projected to add at least $1.5 trillion to the national debt over the next debate. “The CBO’s report exposes the staggering costs of the GOP tax scam and Republicans’ contempt for fiscal responsibility,” House Minority Leader Nancy Pelosi, D-Calif, said in a statement Monday. “In their craven haste to give corporations and the wealthiest 1% massive tax breaks, Republicans saddled our children and grandchildren with trillions of dollars of debt.” Congress also passed a $1.3 trillion spending bill last month — a bipartisan agreement that increased defense and domestic spending alike. Republicans have faced a backlash from conservative activists over the measure, which Trump reluctantly signed into law. The head of the Peter G. Peterson Foundation, which advocates for more balanced budgeting, said the debt would hit its highest level since World War II in 10 years, crowding out private investment and reducing the government's flexibility to respond to downturns. House Minority Leader Nancy Pelosi, D-Calif., holds a news conference on Capitol Hill in Washington on March 15, 2018. (Photo: J. Scott Applewhite, AP) “During a time of low unemployment and economic expansion, we should be taking reasonable steps to put our debt on a sustainable path – but instead we are piling up trillions of bills that will harm the next generation’s economic prospects and prosperity,” said Foundation CEO Michael A. Peterson. To assuage conservative anger over the spending bill, House Republicans plan to hold a vote this week on a balanced budget amendment to the Constitution. But that vote is symbolic—it will almost certainly fail to garner the supermajorities needed to send the amendment out to the states for ratification. Democrats say that vote is a political move and demonstrates that Republicans want to slash cherished domestic programs. “From day one, the Republican agenda has always been to balloon the deficit in order to dole out massive tax breaks to the largest corporations and wealthiest Americans, and then use the deficit as an excuse to cut Social Security and Medicare,” said Senate Democratic Leader Charles Schumer, D-N.Y.

Answer 1

1. Difference between debt and deficit:

The deficit is the difference between what a Government takes in from taxes and other revenues (called receipts) , and the amount of money it spends (called outlays). The items included in the deficit are considered either on-budget or off-budget.

The total debt is viewed as the accumulated deficits plus accumulated off-budget surpluses. The on-budget deficits require the U.S. Treasury to borrow money to raise cash needed to keep the government operating. It borrows the money by selling securities to the public.

The Treasury securities issued to the public and to the Government Trust Funds then become part of the total debt.

2. Relationship between deficits and the debt:

Deficit in Budget will lead to Debt. So people treat it to be the same. But then you may have reserves to dig into, in that case Deficit may not lead to debt.

Deficit simply means you had planned to spend so much over a period of time to accomplish some goals. But if somewhere in between you have spent all your cash and now you are short of it to meet your goal. To meet your goals you now need debt.

Deficits are tax revenues minus expenditures for this year. Debt is the accumulated total of these deficits

3. When a Government spends more than it takes in, it must borrow the rest. It does so by selling bonds, which compete with corporate bonds and other financial instruments for the available supply of funds.

As some savers decide to buy government bonds, the funds remaining to invest in private bonds must shrink. Thus, some private borrowers get "crowded out" of the financial markets as the government claims an increasing share of the economy's total saving.

Some economists are of the view that each $1 of government spending crowds out exactly $1 of private spending, leaving "expansionary" fiscal policy with no net effect on total demand. In their view, when G rises, I falls by an equal amount, leaving the total of C + I + G + (X - IM) unchanged.

4. Is interest on the debt mandatory spending as part of the federal budget?

Mandatory spending is spending that Congress legislates outside of the annual appropriations process, usually less than once a year. It is dominated by the well-known earned-benefit programs Social Security and Medicare.

It also includes widely used safety net programs like the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and a significant amount of federal spending on transportation, among other things.

Mandatory spending makes up nearly two-thirds of the total federal budget. Social Security alone comprises more than a third of mandatory spending and around 23 percent of the total federal budget. Medicare makes up an additional 23 percent of mandatory spending and 15 percent of the total federal budget.

5. Balanced budget amendment : It is a constitutional rule requiring that a state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government. Most balanced-budget provisions make an exception for times of war, national emergency, or recession, or allow the legislature to suspend the rule by a supermajority vote.

There is no balanced budget provision in the U.S. Constitution, so the federal government is not required to have a balanced budget and usually does not pass one. Several proposed amendments to the U.S. Constitution would require a balanced budget, but none have been passed.

Unlike the constitutions of most U.S. states, the United States Constitution does not require the United States Congress to pass a balanced budget, one in which the projected income to the government through taxes, fees, fines, and other revenues equals or exceeds the amount proposed to be spent. This has led to deficit spending and the creation of a national debt.

6. What is Congressional budget Office?

Federal agency responsible for composing and reporting data related to the federal budget for members of Congress. The goal of the agency is to provide Congress with accurate and timely information, which can be used to assist them in making educated decisions regarding monetary policies and taxation.

The agency was established as a nonpartisan entity, so the political party in charge should have no control over the findings or suggestions it makes. The documents that CBO publishes fall into two main categories: cost estimates and mandate statements. CBO was founded on July 12, 1974, with the enactment of the Congressional Budget and Impoundment Control Act.

It plays a vitally important role in the federal budget process. The CBO also calculates how many people would be eligible for benefits when Congress expands a program such as Medicaid. It also does assessments of the effect on the U.S. economy of legislation such as a bill to reduce greenhouse gas emissions.