Question

In your opinion, how serious is the problem of the federal budget deficit and the national debt in the United States? Incorporate a discussion of the issues surrounding deficits and the debt in your answer.

Answer 1

---> Despite a reasonably strong economy, the federal deficit is large by historical standards and projected to rise unless Congress makes changes to tax and spending policies. Big deficits mean a growing federal debt—the total the government owes—which is already at its largest point since World War II. Extraordinarily low interest rates allow the U.S. to shoulder a heavier debt burden, but the debt is on an unsustainable course and its size may limit the government’s ability or willingness to fight the next recession with tax cuts or spending increases.

---> In fiscal year 2019, the federal deficit amounted to about $1 trillion or 4.6% of gross domestic product (GDP), the value of all the goods and services produced in the U.S. in a year. By international norms, that’s not huge, but deficits over the last 50 years have averaged a much smaller 3% of GDP. The deficit hit 9.8% of GDP in fiscal 2009 during the worst of the Great Recession, then shrank for several years as the economy improved, Congress was tight-fisted on the spending it appropriates annually, and taxes were raised a bit on upper-income Americans. Even though the economy has been reasonably strong lately, the deficit has been growing, largely because of the big 2017 tax cut which was not accompanied by any significant spending cuts. Large deficits are not good for the economy in the long run because of low sovereign debt ratings,low investments etc.

--> The debt is the total amount of money the U.S. government owes—the sums it borrowed to cover last year’s deficit and all the deficits in years past. Each day that the government spends more than it takes in, it adds to the federal debt. When the fiscal year ended on September 30, 2019, the federal government owed $16.8 trillion to domestic and foreign investors which is 79% of USA's gdp. No one really knows at what level a government’s debt begins to hurt an economy; there’s a heated debate among economists on that question. If interest rates remain low, as anticipated, the government can handle a much heavier debt load than was once thought possible. But eventually private borrowing will be crowded out if the government’s debt continues to grow. Simply put, the federal debt cannot grow faster than the economy indefinitely so something has to give.Debt at this level does limit the amount of flexibility the U.S. government has if it confronts another financial crisis or a deep recession and wants to borrow heavily, as it did during the Great Recession.

---> If current policies persist without change—a big “if”—the Congressional Budget Office projects that deficits and the debt (as a percentage of GDP) will rise as more Americans become eligible for Social Security and Medicare, as health-care costs continue to grow faster than the economy, and as interest rates rise to more normal levels. Looking out 25 years—admittedly tricky because there’s so much uncertainty—the CBO projects that the federal debt will hit 144% of GDP in 2049 unless Congress changes tax or spending policies before then.