Question

Since the 1970s, the U.S. Government has run persistent budget deficits, even during periods of strong economic growth and despite bipartisan agreement that deficit reduction is a priority. Briefly discuss some probable causes of persistent federal budget deficits using the principles of public choice theory described by Calcagno (2010).

Answer 1

Why Persistent Deficits?

These unsustainable deficits deeply concern policymakers. Five of the above seven nations have run deficits in each of the past eight years, despite satisfactory economic growth over the period. As for the two exceptions, Japan has run deficits in each of the past three years, and the United Kingdom in each of the past six years. Most economists agree that commitment to social welfare programs, demographic trends, and fundamental macroeconomic shifts are the main causes of the deterioration of fiscal positions across the industrial world and that each of these factors needs to be addressed for budgetary balance to be achieved.

Deficit Reduction

Most industrial nations recognize the need to reduce deficits, but as yet few have addressed the problem comprehensively. Most have engaged in piecemeal policymaking to mitigate the most pressing deficit problems. Although these measures do provide some relief, more drastic action is needed.

Developing Countries

Budgetary issues in developing countries differ from those in industrial countries. Usually smaller and structurally different, developing economies may set other goals from those of industrial nations, focusing, for example, to a greater degree on building infrastructure, creating an industrial base, and encouraging new business formation. Their populations are younger and less skilled, and they have limited access to capital. Fiscal policy in developing countries faces unique challenges. Budgets are smaller, personal incomes are lower, and tax collection is often erratic. Much employment occurs outside the formal economy, making transactions difficult to tax. Financial markets in developing countries are often inefficient, making it hard for governments to finance their deficits.