Question

Explain why the federal debt continues to grow at such an accelerated rate. If possible, mention both discretionary and non-discretionary.

Answer 1

A) Reason behind federal debt continues to grow at accelerated rate.

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Abstract

Let us understand the reason behind federal debt which is growing at accelerated rate and its impact on the US Economy

General speaking high levels of federal debt always affects many other aspects of the economy .For example, higher interest rates resulting from increased federal borrowing would make it harder for families to buy homes, finance car payments, or pay for college.

The national debt level of the United States is a measurement of how much the federal government owes its creditors.

Therefore it is very important to have the control over the debt amount and unnesseracy expenses that is proposed by the government.

U.S. government almost always spends more than it takes in, the national debt continues to rise.

That's because as a country's economy grows, the amount of revenue a government can use to pay its debts grows as well.

In addition, a larger economy generally means the country's capital markets will grow and the government can tap them to issue more debt.

This means that a country's ability to pay off debt, and the effect that debt might have on the country's economy, is dependent on how large the debt is as a proportion of the overall economy, not the dollar amount.

Social Security program, defense, and Medicare were the primary expenses that lead to fiscal deficit.

Below are the primary reasons behind the accumulation of large debt on US Government

1) Overburdened Social Security System

Due to the increasing number of retirees and their longer life spans, the size and cost of payments are increased. Parents having fewer kids are limiting the pool of present-day contributing workers.

Recent economic downturns have also led to stagnant pay. Overall, limited incoming and more outgoing cash flows are making Social Security a big component of the national debt.

Limited jobs and lower or stagnant salaries have been the blockade for increases in this stream of government income.

2) Healthcare

U.S. government alone still spends more on healthcare than the governments of Canada or Italy.

Healthcare spending takes up roughly a quarter of government spending, up from 12% in 1990. The hugely disproportionate amount the U.S. spends on healthcare is a major contributor to the national debt.

3) Continued Tax Cuts

Tax cuts introduced by multiple presidential administrations have continued to grow the national debt

Individual taxpayers contribute nearly half of annual tax receipts and gradually reduction in taxes lead to lower the income source of governement.

The challenge, For Example.along with the Trump tax cuts, has been slow-to-grow U.S. salaries, resulting in limited tax collection.

Similar to corporate taxes, excise taxes have shown dismal collections, as well.

B) Discretionary behind federal debt

Monetization

A country with its own fiat currency can always simply create as much currency as it owes in order to pay its debts, if those debts are denominated in its currency

Monetizing debt can also make creditors less likely to lend to a country if inflation significantly lowers the value of what creditors are repaid

Interest Rate Manipulation

Maintaining low-interest rates is one method that governments seek to stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt. Low-interest rates make it easy for individuals and businesses to borrow money.

Spending Cuts

One way to cut debt is to cut spending. This can be difficult in two ways. First, each government expenditure has its own constituency that will fight efforts to cut that expenditure, making spending cuts politically difficult.

Secondly, if done during a severe economic downturn, spending cuts can damage the economy through a negative multiplier effect. T

C) Non-discretionary behind federal debt continues to grow at accelerated rate.

Increase Risk of Government Default

As the national debt per capita increases, the likelihood of the government defaulting on its debt service obligation increases, and the Treasury Department will thus have to raise the yield on newly issued Treasury securities in order to attract new investors.

This reduces the amount of tax revenue available to spend on other governmental services because more tax revenue will have to be paid out as interest on the national debt.

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