Fiscal Policy
A deficit on the national budget takes place when national spending is more than the revenue in a given fiscal year. It is equal to the government spending less revenue collectible (Eisner, 2004). On the other hand, a budget surplus occurs when government revenue collectible is more than the national spending in a given fiscal year. In the case of the United States, these two aspects of fiscal policy have some effects on the economy (Eisner, 2004).
A budget deficit means that the government has to look for alternative ways of filling the void in the budget. In this case, taxpayers have to bear the burden since the government will have to increase taxes by a significant margin. Taxpayers will have to dig deeper into their pockets to meet the demands of the revenue authority (Ricciuti, 2003). This means that households will have to survive on strict budgets, which could necessarily mean cutting on their spending. When a deficit is significantly high, the government will also seek to reduce its annual spending, which has an impact on the amount the national treasury allocates to government services. This normally includes such services as infrastructure, social security, and security (Ricciuti, 2003). Social security and Medicare services, which draw direct or indirect funding from the national treasury, are always among the first services to experience massive cuts on the allocations they get from the government (Seater, 2006).
A deficit will also have indirect effects on the private sector. Since the government will reduce its spending and increase tax rates, the private sector will have to bear increased taxes. In turn, businesses will increase the cost of goods and services to maintain their profitability. However, as households cut on their spending, business organizations and the private sector, in general, will make losses or operate under strict budgets. Since both the government and the private sector reduce spending, they will attempt to reduce the amount of money they allocate to salaries and wages (Ricciuti, 2003). Since they are not willing to send off their employees, they need to reduce or temporarily halt the process of hiring (Eisner, 2004). As such, the rate of employment will reduce, while the number of unemployed people will increase. Also, unemployed people will be spending more than normal in their daily needs due to an increase in taxes imposed on businesses and the private sector.
One of the major initiatives the government is likely to undertake in case of a budget deficit is to reduce national spending. Therefore, higher education, like Medicare and social services, will face reduced allocations. This means that students who depend on the government for loans in their college and university levels, such as those at Phoenix University, may feel challenged by the reduced allocations as well as an increase in the price of some goods (Seater, 2006).
A budget deficit is also likely to affect the reputation of the financial position of the US on an international level. For instance, a budget deficit always affects foreign trade and investment. Since the private sector will be facing increased tax and reduced trade, they are less likely to allocate enough resources to their foreign investments (Eisner, 2004). They will also reduce the number of resources they spend on foreign plants and equipment. It is also worth noting that they are likely to reduce the amounts of resources they allocate to imports because their markets will be affected by the, while trade on such goods will also reduce in volume and value (Ricciuti, 2003).
A budget deficit is also likely to have an impact on importers, especially foreign organizations that depend on goods from the US. For instance, the US dollar is the principle currently used in international trade due to its adoption by the IMF and WTO. As such, a deficit, which is likely to affect the international value of the US currency, will have an impact on world trade (Ricciuti, 2003). This means that importers will incur losses due to the unstable dollar and may decide to reduce the value of imports or shy away from importing goods from the US. Finally, due to reduced local and international trade between the US and foreign nations, the GDP will likely reduce significantly during the specific fiscal year.
A budget surplus, on the other hand, is also not good if it exceeds the normal limits by a greater margin. However, it is normal for the government to give back to the taxpayers whenever there is some significance in a budget surplus. For instance, the government decides to cut on taxes and reduce the tax burden on the taxpayers (Eisner, 2004). Besides, a surplus leads to an increase in income transfers such as in the prescription of drugs to benefit Medicare and other government services such as higher education loans, social services, and security (Ricciuti, 2003). Also, the government may decide to save the surplus and use it in paying the US’s international debt, thus enhancing the nation’s international financial reputation. If the government decides to use the surplus on goods and services, it will likely hire more employees such as teachers, healthcare workers, and security officers. Also, the surplus may be directed to development, thus increasing the rate of infrastructural development (Eisner, 2004). In all these initiatives, the rate of employment is set to rise, while foreign trade (both exports and imports) is likely to increase significantly. Finally, the country’s GDP may increase by a significant margin.
References
Eisner, R. (2004). Budget Deficits: Rhetoric and Reality. Journal of Economic Perspectives 3, 73-93
Ricciuti, R. (2003). Assessing Ricardian Equivalence. Journal of Economic Surveys 17(2), 55-78.
Seater, J. J. (2006). Ricardian Equivalence. Journal of Economic Literature 31, 142-190.