Budget Deficits and the Economic Growth

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Budget Deficits and Economic Growth
Joey Willoughby
ECO 203 Principles of Macroeconomics

Instructor: Nathan Rondeau

6/27/2011

Budget Deficits and Economic Growth

Economists generally agree that high budget deficits today will result in the reduction of the growth rate of the economy in the future. The United States budgetary situation has disintegrated significantly since 2001, when the CBO ( Congressional Budget Office ) forecast average annual surpluses of nearly $850 billion from 2009 – 2012. In April of 2011, it was revealed that our nation is 12.7 trillion dollars in debt which surpasses by a wide margin, the 2001 CBO forecast of a cumulative surplus by 2011 in retrospect to the estimated 10.4 trillion public indebtedness. ( cbo.gov) Steps must be taken to curtail this situation immediately if the United States economy is to be sustainable in the future. A high debt level can affect interest rates, inflation and economic growth, but no effect on equilibrium real GDP, thus government spending in excess of government recipiency ultimately redistributes a larger GDP to government provided goods and services. In reality, if the government continues to operate with elevated deficits over an extended period of time, the share of privately owned goods and services will dwindle. In spending more than is collected in tax revenue and etc. the government will engulf a larger portion of economic activity in the future. (newsobserver.com)

Since 2002, our country has seen the appearance of duel deficits, or a growing budget deficit coupled with a growing account deficit, which manifests the increase of the United States borrowing from foreign nations. The current budget deficit is not as immense as in percentage of GDP terms however it is significantly above a level that is conducive to stable prices and low interest rates – two extremely vital elements of a flourishing economy. The higher the budget deficit the lower GDP growth that the U.S. will achieve. Further attacking our future economic growth is the looming threat of the U.S. government defaulting. If this scenario should materialize we would see a staggering ratio of bank failures, runs on banks and market mutual funds, states and cities would face imposing runs and would consequently be unable to borrow. ( brookings.edu) Also, an assortment of factors are exerting increasing pressure on the American dollar. The U.S. dollar is the world’s reserve currency. The increasing pressure results in added inflationary values. If another currency should actually replace the American dollar as the reserve currency, the United States would face higher interest rates to attract capital, thus reducing the growth of the economy for the duration. We are currently experiencing both a structural deficit and a cyclic deficit in this country. These two combining factors are resulting in rising interest rates, and higher taxation among other negating consequences, for the high and steadily ascending U.S. budget deficit. The Fed faces an acute quandary in this instance, as it cannot sit and “hold its hands” while inflation at the consumer level rockets into outer space and beyond. On the opposing side of the equation, we require low interest rates to assist commercial activity in jump starting our economic growth. Higher interest rates would further jeopardize economic growth in the future. ( Miller, Roger L.) The most animated aspects of a national debt are on the supply side of the economy. An increasing national debt enhances the interest rates with investment deficiencies ensuing as the debt continues to escalate. This scenario will result in less capital, primarily in the physical sense, which will be passed down to future generations of Americans. This almost guarantees that our children, grandchildren and beyond will face the onus, by a lowered capacity for productivity, or a...
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