Question

The following report outlines the most recent data on the current US budget deficit. Please discuss in full how you believe deficit spending has influenced the US economy. Your essay should (1) describe the factors contributing to this deficit, i.e. the effect of taxes and spending on the US budget deficit. (2) Explain, using aggregate supply and aggregate demand analysis why the white House believes deficit spending will boosts US economic growth. (3) Explain, based on the current state of the economy whether deficit spending will have an inflationary effect on the economy, and whether it will significantly enhance economic growth. You must use current information reported by the BLS on CPI and GDP trends when presenting this explanation. You must also use aggregate supply and aggregate demand analysis when presenting this explanation. (4) Your explanation on the tax cut effect must use the tax multiplier to reveal how a tax cut effects aggregate demand. (5) explain supply side economics and this theory’s hypothesis on the expected effect of economic growth due to a tax reduction. Your essay should be at least five paragraphs that separately address each of the number required explanations, and must include a figure of aggregate demand and aggregate supply to refer to when explaining you view on this topic.

Bloomberg U.S. Budget Deficit Widens to $319 Billion Amid Flat Revenue By Katia Dmitrieva

February 13, 2019 1:00 PM CST Updated on February 13, 2019 1:40 PM CST

The U.S. budget deficit widened to $319 billion in the first three months of the government’s fiscal year as spending increased and revenue was little changed, according to the Treasury Department.

The shortfall grew by 42 percent between the October to December period, compared with the same three months the previous year, according to the latest Treasury monthly budget report released on Wednesday. Receipts climbed by 0.2 percent to $771.2 billion, while spending was up 9.6 percent to $1.1 trillion.

The latest data will likely fan concerns over America’s growing national debt, which topped $22 trillion this week. The fiscal deficit is projected to keep growing and surpass $1 trillion by 2022, according to the Congressional Budget Office, fueled in part by President Donald Trump’s $1.5 trillion tax-cut package and government spending increases. The White House has said the measures will boost U.S. economic growth and create jobs.

Tariffs imposed by the Trump administration on Chinese goods and other imports including steel and aluminum are boosting revenue. Customs receipts nearly doubled to $17.8 billion in the first quarter from a year earlier, according to Treasury. The trend is “largely because of new tariffs imposed by administration in the past year,” according to a separate budget analysis by the non-partisan Congressional Budget Office released last month.

Corporate and individual-income tax receipts both fell in the quarter, by 17.3 percent and 3.5 percent respectively, the Treasury data showed.

The growing budget deficit is concerning for fiscal hawks, who say it risks economic growth and U.S. credit quality. Net interest payments on the national debt jumped 19 percent to $99.6 billion in the first quarter of fiscal 2019.

The government ran a deficit of $13.5 billion in December, compared with a $23.2 billion-gap the same month a year prior, according to Treasury. The department’s report was originally scheduled for release in January but was delayed by the partial government shutdown.

Answer 1

Budget deficit occurs in any country when its current expenses exceed the amount of income received through standard operations. It has been said that US federal budget deficit for fiscal year 2020 is 1.103 trillion dollar. It has also been said that US deficit is 1% greater than the last year.

As far as reasons of deficit is concerned, many factors are taken into consideration. First one is an increase in US government spending if 4.74 trillion dollar which is more than its revenue of 3.643 trillion dollar. It has been said that attacks of 9/11 led to war on terror. It results in an increase in military spending which rose from 111.9 billion dollar in 2003 to 150.8 billion dollar in 2019.

Defense spending is estimated to be 989 billion dollar. US military spending is greater than the next 10 largest government expenditure combined. It means it is 4 times bigger than China military budget and 10 times than Russia.

Tax cut is another factory linked up with deficit spending. Tax cuts will immediately reduce revenue for each dollar cut. According to the report of National Bureau of Economic Research, it has been found that only 17% of revenue from Income tax cuts was regained. Tax cut reduce personal income tax rate, corporate taxes and small business taxes. These cuts will cover total of 1.5 trillion dollar over the next 10 years.

Tax cuts boost a aggregate demand which leads to higher real GDP. Tax cuts for businesses increase their retained profits and will increase Aggregate demand and supply also in the long run. Tax, cuts leads to increase in disposable income and increase consumer spending. High demand will boost economic growth in the short run. But it is not guaranteed that growth is seen in long run as well. If one want to boost the economy then better to target tax cuts at lower income groups. This is because tax cut for rich will be seen in savings or invested in assets.

As far as deficit spending and inflation is concerned, inflation is seen as a continuous increase of price levels. In US, a budget deficit leads Federal reserve to release more money into the economy which ultimately create inflation ultimately inflationary monetary policies are adopted In Feb, CPI for all urban consumers increased 0.2% on a seasonally adopted basis. rising 1.5% over the year. Index for all items except food and energy rose 0.1% in Feb.

As it has been said that tax cuts increases the income of richer sections then the use of tax multiplier is effective If government raises income tax then it ultimately reduces Aggregate demand which reduces real GDP and then price will ultimately be controlled.

As far as supply side economics is concerned it was said that tax cuts reduce revenue for each dollar cut. But supply side economics side is concerned, it has been said that government may cop up the loss in the long run by boosting economic growth and tax base.

It is stated that nearly 50% of tax obtained by government comes from income tax on individuals with additional 10% from business and corporations.

Presently US economy is growing at a rebate of 2.2% percent. Largest source of GDP is consumer spending in US.

Till 2018,spending on durable goods fell 3.3% while on non-durables rose by 0.1%.

It is expected that deficit spending and tax measures may boost the economy in the long run as well.

dollar.