Running head: Current Debt and Deficit Situation in the United s Current Debt and Deficit Situation in the United s Introduction The United States has faced budget deficit and debts, which has led to the development of situations similar to those witnessed in European countries such as Greece. Given that the US government has been spending heavily in some programs such as Medicaid and Medicare, lack of extra avenues for revenue collection has led to emergence of debts. The issue of debts has raised debates with politicians being divided on whether to embark on the austerity measures that have been recommended for the Greek government (Chang, 2012).
This paper is going to highlight the debt and deficit situation in the United States and compare it with the situation in Greece. Discussion The Current Debt and Deficit Situation in the United States In recent years, the United States government has been spending more than it has been collecting in revenue. Following attempts to bridge the gap each year, the government has been faced with a budget deficit (Maskin, l994). Currently the US has a deficit, which amounts to a significant proportion of the country’s Gross Domestic Product (GDP).
This deficit is the highest since the Second World War. This has made US enter the danger zone being experienced by European countries such as Portugal and Greece (Mehra, O’Neill, & Wolfe, 2011). Economists indicate that the debts and deficits faced by US government will have a lasting and significant impact on the financial markets in US and abroad. The issue of recent escalation of debts and deficits has become an important topic in US politics with the republicans and democrats formulating ways through which the debt can be reduced.
(Mehra, O’Neill, & Wolfe, 2011). The aforementioned politicians see the need to cut spending and increase revenue. However, in increasing revenue the government will be forced to raise taxes (Tanous, Cox, & Santelli, 2011). Furthermore, lowering expenses poses a challenge to the government. In the book Debt, Deficits, and the Demise of the American Economy, Tanous, Cox, & Santelli, (2011) indicate that current debt in the US emanated from heavy spending in Medicare, Social Security and Medicaid.
Moreover, there was a large budget expenditure in the sector of defense. According to Setser & Roubini (2012), the country is adding its debt at an alarming rate. Consequently, the current deficit in US is comparable to the likes of Mexico and Thailand during the times when the countries faced serious financial crisis. It is during recent years when US has borrowed funds to finance investment in the private sector. Currently, the country is borrowing from foreign countries inorder to finance the budget deficit of its federal government. Despite the economic growth witnessed in recent years, the budget deficit has not been reduced but there has been an increase in private demand for savings, which has had a net effect of increasing foreign borrowing (Setser & Roubini, 2012).
Economical statistics indicate that US debt is likely to increase in the near future since external debt is growing and the interest on the debt is on the rise. In the light of this, the deficit in the current account will grow continously as there will be higher payments on the foreign debt. Solution as proposed by the Administration and leaders in Congress.
The US president and the leaders in the congress have reached to an agreement on packages that would extend the debt ceiling of the federal government (Silverleib & Cohen, 2011). Moreover, these packages would cut spending resulting in the reduction of the current deficit. Furthermore, the proposals by the congressional leaders seek to bring relieve to the global markets who are keenly watching the developments. The US president called for the allocation of four trillion dollars in the reduction of deficit.
This amount was to be phased in less than twelve years (The Telegraph, 2012). Seventy five percent of these funds would come from interest savings and spending cuts whereas twenty-five percent would come from the reduction of tax breaks. The House of Representatives agreed on this move by adding that the reduction of the deficit can lower the tax rates for individuals and businesses. On the same note, democrats and republicans who are part of the deficit commission called for the reduction of deficits via spending cuts. The commission also called for tax breaks in order for companies and individuals to raise revenue and achieve a reduction in tax rates.
Particularly, the democrats formulated a plan in which a deficit of 1.2 trillion would be offset in a decade (The Telegraph, 2012). According to the Telegraph (2012), in a bid to offset the deficit, the House of Representatives saw the need for the reduction of the taxes that were instituted during the reign of President Bush. The deficit commission recommends for the overhauling of the taxes, which favors one taxpayer or one business over the other.
This strategy will lead to an increase in savings, which would minimize the deficit while lowering the rates. In order to offset the deficit and the national debt, the government proposes less spending on the defense sector. Spending in the defense sector includes retirement spending, military healthcare and nuclear spending. The recent budget on defense is significantly reduced with a fraction of the funds being directed towards savings. Moreover, the democrats proposed that streamlining the programs related to security would lead to savings, which would offset the current deficit (The Telegraph, 2012).
Comparing the American and Greek Situation and the Use of Austerity Measures Similar to Greece, the United States is facing a situation, which could make the global community lose faith in the country’s credit. The debate on the debt ceiling could be the genesis of a crisis similar to the one faced by the European countries. Moreover, the problems being faced by the United States are similar to the ones that Greece faced. These include a decline in the growth of the economy, and heavy borrowing.
However, unlike Greece, the US has a competitive economy, exports major products and has a rich population that can fuel an expansion (Zakaria, 2011). The two countries have had a history of external borrowing, with Greece being notorious for not being able to settle her debts. Moreover, Greece cannot control its currency because of being in the Euro zone. The recent trends in the United States may culminate in the country’s inability to control its currency and the loss of the dollar’s value. In order to offset their debts and deficits, the governments of the two nations will have to embark on tax increases and spending cuts which might have adverse effects on the economy.
Particularly, the United States had its congress leaders enact recommendations by a democrat commission on the reduction of the deficit in ten years. Similar to the situation in Greece, the political system in US has failed to address the economical problems. This is because the large deficit cannot be offset by spending cuts and increased taxes (Zakaria, 2011). According to Zakaria (2011), the United States has lost a governing class with the republicans taking American creditworthiness less seriously than they ought to.
Lack of seriousness in settling the deficit may lead to the sale of assets that are owned by the state, a move used by Greece. In case the US rates fail to rise soon, there will be a slow economic growth. This will instill fear among investors. Moreover, such a development may make investors choose to punish the US currency in case they feel that the Congress is not taking the right measures to ensure that the country’s budget is on the right track.
Furthermore, the weakening of the dollar may have repercussions such as credit downgrade, which was witnessed in Greece (Sahadi, 2011). The austerity measures that have been applied in Greece cannot be used to address the situation in United States. According to Grover (2012), the US government should promote growth rather than raise taxes and cut spending. Moreover, the strategies to raise taxes and cut spending can only provide a short-term solution. These strategies cannot be successful without the creation of jobs. Byron (2012), indicates that austerity measures have the negative effects on the economy in the long term as they dampen expenditure and lead to a slow rate of economic growth.
However, incase the United States was faced by a single economic problem such as ballooning debt, choosing austerity measures would be reasonable. In the light of this, the critical problems in the United States which call for immediate actions are high unemployment, depressed investment and a fall in aggregate demand which emanated from financial crisis.
In case the government embarks on austerity measures, there will be an increase in unemployment which will affect demand. Conclusion In summary, the situation in United States calls for other measures other than the austerity measures. Although the country continues to experience debt and deficit situation, using austerity measures like Greece can result in unemployment, which can further aggravate the economic situation. This paper has compared the debt situation in the United States to that in Greece. The two countries have engaged in heavy borrowing from outside countries, which has led to their current debt situations.
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