Question

Should the United States government be required to have a balanced budget? What are the long-term implications of continued government indebtedness?

Answer 1

There is no provision for a balanced budget in the USA. Constitution, and the federal government doesn't need a balanced budget and generally doesn't pass one. Several changes proposed for the U.S. A balanced budget would require a constitution but none has been passed. Some of these amendments authorize a supermajority to suspend a balanced budget requirement in times of war, national emergency or recession.

Large sustained federal deficits result in lower investment and higher interest rates. A higher percentage of the savings available for investment would go to government securities with government borrowing more. This, in turn, would reduce the amount invested in private ventures such as factories and computers, resulting in less productive workforce. As interest rates from historically low levels return to more typical levels and the debt rises, federal interest payments will rise rapidly. As interest consumes more of the budget, we will have less money to spend on programmes

Governments often borrow to deal with unforeseen events, such as wars, financial crises and natural disasters. When the federal debt is low this is fairly easy to do. However, policy has less options available with a massive and rising federal debt. For instance, during the financial crisis several years ago, when debt was only 40 percent of GDP, the government was able to respond by increasing spending and reducing taxes to stimulate the economy. As a result, however, federal debt grew to nearly double its share of GDP.

If the debt continues to climb, creditors will at some stage lose faith in the ability of the government to repay the borrowed funds. Investors would demand higher interest rates on the debt, and rates could rise sharply and abruptly at any point , causing wider economic consequences: