There are many suggestions by economists on causes and solutions to economic disasters. United States deficit, according to the treasury department, has increased to$1.10. The congressional budget office estimates that the figure will exceed $1 trillion from 2022 onwards. The reason is an expenditure of $4 trillion more than the revenue of $3 trillion. Such an increase will affect the economy significantly. Before then, the federal budget should be reduced to save the United States from economic disaster.
The United States might have a large economy, but it is impossible to sustain higher deficits for a long time. Reducing a larger budget deficit is problematic. The country may get to a time when it will adopt policies that initiate a sharp deficit reduction if the deficit increases too rapidly. These policies are austerity measures that may cause a reduction in aggregate demand.
For instance some countries in Euro zone tried reducing the budget deficit for compliance with EU rules, but it ended up creating a lower growth of the economy, recession and loss of jobs. The government borrows from the private sector during a budget deficit. The private sector after lending will spend and invest less because the funds will be lower. A budget gap is a situation that causes crowding out of the private by the government .some economists argue that government spending even after borrowing from the private sector is liable to more inefficiency. Borrowing from the private sector means that a higher percentage of the national income will be spent on paying debt interest.
A federal budget is not always a bad thing. A government can overcome market failures and improve the economy’s productive capacity by borrowing to improve the infrastructure. The returns from public sector investment might be more than the cost of borrowing, so the economy in the long term will benefit due to government borrowing and investments. It is just like an individual borrowing to build a new factory.
Running a deficit is right at times, especially for a short term if the government will fund public investment that offers a high rate of return. However, the federal government should pursue ways of balancing structure deficit. It should reduce the federal budget deficit to save the United States from economic disaster.
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