Federal budget problems

Federal budget problems

Introduction

Federalism is a form of government in which power is shared between states governments and the national government, as seen U.S government. The federal budget is associated with many problems and thus most federal governments operate under budget deficits, with spending outstripping the sourced revenues. Congressional Budget Office (CBO) causes these problems by making some assumptions when coming up with the 10 years projections. The unrealistic projections by CBO are the source of the current problems associated with the Federal budget. First, it assumes that Congress extends some expiring spending programs and that all temporal tax provision will expire. The tax sunsets make it possible to increase the annual tax cuts so as to extend the tax cut past its expiration thus putting the fiscal policy on an increasingly unstable course[1]. Secondly, CBO assumes that the discretion spending grows annually only because of inflation. This is not realistic because it will be difficult to maintain current services if spending does not keep pace with population growth.

The last unrealistic assumption involves the alternative minimum tax (ATM) which was originally believed to raise taxes for the wealthy people. This will cause a burden to the middle-income class of households hence raising their expenses. The policymakers will be forced to cut back the ATM since it is not adjusted for inflation because it covers more taxpayers as prices and incomes rise. All these assumptions leave the federal budget with a big deficit over the next decade.

The factors that push the budget into deficit are the key problems of the federal budget in our country. Over 75% growth in nominal spending is driven by federal health programs, social security, and interest on the public debt. The available sourced revenue will not match with the growing spending, thus increasing the deficit for the next fiscal year. These are mandatory spending mandated by law for specific programs and cannot be avoided.

Mandatory spending – basically spending on entitlement programs for retired and disabled workers increases spending growth to greater extend[2]. A large percentage of an aging population means allocating a huge amount of government revenue for their expensive health care needs. Medicare offers health care services for elderly and disabled citizens, which takes quite a large percentage of revenue due to the increasing number of citizens over the age of 65. Medicaid provides health care services for another good percentage of citizens, including those in nursing homes, the poor and the disabled. The remaining small percentage of revenue is then directed to discretionary spending, the optional part of fiscal policy approved by lawmakers. It includes spending on agency programs and operations such as education, defense, energy, and housing, taking roughly 30 percent of the total budget.

The $1.2 trillion allocated for Nation Security in our country is more than the base budget and a burden to the taxpayers. This ever-growing sum is a major problem for our budget which is leading to deficit spending. Most of this money is being wasted and the impact is felt by the average taxpayer. Since the government does not have enough money to fund all its projects, this means it will borrow the remaining amount from U.S Treasury note or private sources hence increasing the public debt. Large public debt will attract high interests by investors which in turn increases the overall public debt. Interest payments will consume not less than 10% of the total federal budget and the resulting debt is borne by the taxpayers and workers of tomorrow. This will lead to reduced living standards, higher taxations, and higher inflations and reduced future national income.

To slow the growth of the budget deficit, I propose specific cuts in some harmful expenditure so as to reduce extra government spending. Congress should come up with criteria to downsize the allocation for national security and without compromising it. To control the fast-growing spending on National Security presently at $1.2 trillion, Congress should cut wasteful programs and prioritize only the discretionary spending that is essential. Get rid of those programs that benefit only a group with a special interest in national security at the expense of taxpayers[3]. By doing so, Congress will reduce the non-defense discretionary spending by a large percentage and hence balancing the federal budget in the long run.

To reform the growing mandatory spending on social security, Medicaid and Medicare, the blueprint would be to reform these entitled programs since they are unstable in their current form. Make key reforms on Medicare so as to meet the fiscal, demographic and structural challenges; give the states a big flexibility in designing benefits and administering Medicaid program ; the responsibility of running welfare programs be given to the state; and finally protect the seniors from poverty in their retirement by making reforms on the area of Social Security. These series of decisive reforms to the entitled programs would control excessive government spending in the long run and help to balance the federal budget.

Conclusion

Tax reforms will sustain the economic growth by ensuring all Americans have money in their pockets and extending tax cuts for last year permanently. Another tax reform will be to move from the current hybrid income-consumption base to a consumption tax base which will help to boost the economic growth. Lastly, the budget process should be reformed so as to make it more accurate, transparent and accountable for interest costs that increase public debt hence causing a deficit to the federal budget. The budget deficit will be reduced by decreasing spending and increasing revenue which will be more sustainable in the long run thus creating surplus on the budget.

References

Elmendorf, Douglas W., and Louise M. Sheiner. “Federal budget policy with an aging

population and persistently low interest rates.” Journal of Economic Perspectives 31, no. 3 (2017): 175-94.

Huber, Evelyne, Thomas Mustillo, and John D. Stephens. “Politics and social spending in Latin

America.” The Journal of Politics 70, no. 2 (2008): 420-436.

Joyce, Philip G., and Robert D. Reischauer. “Deficit Budgeting: The Federal Budget Process and

Budget Reform.” Harv. J. on Legis. 29 (1992): 429.

Thornton, Daniel. “The US deficit/debt problem: a longer-run perspective.” Federal Reserve

            Bank of St. Louis Review 94, no. 6 (2012): 441-55.

[1] Elmendorf, Douglas W., and Louise M. Sheiner. “Federal budget policy with an aging population and persistently low interest rates.” Journal of Economic Perspectives 31, no. 3 (2017): 175-94.

[2]Thornton, Daniel. “The US deficit/debt problem: a longer-run perspective.” Federal Reserve Bank of St. Louis Review 94, no. 6 (2012): 441-55.

[3] Huber, Evelyne, Thomas Mustillo, and John D. Stephens. “Politics and social spending in Latin America.” The Journal of Politics 70, no. 2 (2008): 420-436.