Macro Research Paper

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The Great Debt Shift from 2000 to 2012
The United States is facing a structural budget deficit in recent years. The fiscal situation has an increasingly dire and unsustainable outlook over the next 10 years and beyond. However, looking back ten years before, when George Bush took office at the beginning of 2001, the federal government was running a substantial budget surplus and projected rising surpluses. Here comes to a question: how did federal government get into this fiscal mess. My paper dedicates to examine the federal budget balance and government policies over last ten years and analyzes the reasons for this dramatic change from substantial surpluses to massive deficits. Furthermore, I will also shed a light on the dilemma facing Obama administration to cut the deficits.

At the beginning of this decade, the US fiscal policy was bright. After running deficit every year from 1970 to 1997, the federal budget was in surplus of $236 billion n the fiscal year of 2000. The surplus accounted for 2.4 percent of GDP. Future fiscal prospects looked promising as well. The Congressional Budget Office at that time predicted that “if current policies remain in place, the surplus will continue to increase after 2000” (CBO, 2000). The accumulated surpluses for year 2010 were projected to total $3.2 trillion under the inflated baseline and $4.2 trillion under the freeze or capped baseline. Despite the shortfalls in Medicare and Social security finances, estimates of the long-term fiscal outlook showed that government was in a manageable shape at least for the following 70 years (Auerbach and Gale, 2000). However, the result turns out to be completely different. According CBO recent report, the budget deficit for fiscal year 2012 has surpassed the $1 trillion mark. Although the official budget figures have improved from a year ago as a result of both higher tax receipts and lower government spending, realistic budget projections continue to show a troublesome medium-term outlook and an unsustainable long-term outlook. According to CBO, even with the economy recovering fully by 2018, a path following current policies on taxes and spending will result in deficits close to $9 trillion, proximately 4.5 percent of GDP over the next decade, with the debt-to-GDP ratio exceeding 85 percent by 2022 and continuing to rise thereafter (CBO, 2012). I am going to examine the causes of this large budget shift and shed a light on current condition. Many political analysts are currently busy pinning the current dismal fiscal picture on Bush administration. Just as President Clinton receives too much credit for balancing the budget, President George W. Bush receives too much blame for creating a budget deficit, especially for his tax cut legislations. Senator John Kerry (D. Mass) for example has long blamed those tax cuts for having “taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see”. The tax cuts enacted in 2001 and 2003 and were extended in 2006, known as Bush tax cuts, targeted at lowering tax rates across the board on income, dividends and capital gains, eliminating the estate tax, further lowering burdens on married couples, parents and the working poor, and increasing tax credits for education and retirement savings. The 2001 bill lowered marginal tax rates, while the 2003 bill centered on dividends and capital gains. The first tax cut was signed by Bush to realize his promise made in the election on returning budget surpluses to the people, with not a hint that it had something to do with fighting recession. The second tax cut was due to government’s underestimation of budget deficit and its strong inclination to create job. According to Bureau of Economic Analysis data, in fiscal year 2001, tax revenue in dollars was $1,991.1 billion. For fiscal year 2002, the first budget of the Bush administration, which went into effect after the first tax cuts, revenue dropped to $1,853.1 billion. In the fiscal...
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