Question

We are looking at a trillion dollar or more federal deficit in the coming year.

    1. What does it mean when the federal government has a deficit?

    2. What agency is responsible for generating the funds to cover the deficit?

    3. How does that agency raise those funds?

    4. Who supplies those funds?

Answer 1

1. A budget deficit occurs when expenses exceed revenue and indicate the financial health of a country. The government generally uses the term budget deficit when referring to spending rather than businesses or individuals. Accrued deficits form national debt. In cases where a budget deficit is identified, current expenses exceed the amount of income received through standard operations. A nation wishing to correct its budget deficit may need to cut back on certain expenditures, increase revenue-generating activities, or employ a combination of the two.

2 and 3. The Government is responsible to generate the funds to cover the deficits, through the following:

a. Interest Rate Manipulation: Maintaining low interest rates is one way governments seek to stimulate the economy, generate tax revenue and, ultimately, reduce the national debt.

b. Raise Taxes: Tax increases are a common tactic. Despite the frequency of the practice, most nations face large and growing debts. It is likely that this is largely due to the failure to cut spending.

c. Pro Business/Pro Trade: A pro business, pro trade approach is another way nations can reduce their debt burdens

d. Bailout: Getting rich nations to forgive your debts or hand you cash is a strategy that has been employed more than a few times. Many nations in Africa have been the beneficiaries of debt forgiveness. Unfortunately, even this strategy has its faults.

e. Default: Defaulting on the debt, which can including going bankrupt and or restructuring payments to creditors, is a common and often successful strategy for debt reduction.

f. The United States finances its deficit with Treasury bills, notes, and bonds. That's the government's way of printing money. It is creating more credit denominated in that country's currency. Over time, it lowers the value of that country's currency. As bonds flood the market, the supply outweighs the demand.

4. There is no single party that supplies the funds, it is the general public who actually help to reduce deficit based on the policies laid down by the government.