The United States of America is one of the developed countries that are still struggling to recover from the effects of the 2008/2009 financial crisis. Although the country has been able to recover from the recession, its economic growth rate as measured by the gross domestic product (GDP) is still very low (DiPietro and Anoruo 410-419). The slow growth is explained by the huge national debt ($16 trillion) and budget deficit among other factors.
Owing to the fact that the Republicans and the Democrats failed to reach a consensus on how to reduce the deficit, the government implemented automatic expenditure cuts in March 2013 that will reduce the budgets of nearly all state-funded programs by 9% in the current fiscal year (Wright).
This paper presents arguments against the expenditure cuts. In particular, it will highlight the potential negative effects of the expenditure cuts on the economy and society in general.
Arguments for Expenditure Cuts
It is apparent that huge fiscal deficits discourage economic growth. In the US, the Republicans believe that the national debt and budget deficit should be reduced through expenditure cuts due to the following reason. To begin with, proponents of expenditure cuts argue that the government can no longer pay its debts through tax revenue.
In particular, tax rates should not be increased in order to raise adequate revenues to maintain the current level of government expenditure and to pay for the existing public debts. This perspective is based on the fact that high taxes reduce consumers’ disposable income (Boyes and Melvin 124). Thus, raising income taxes will lower consumption and the quality of life in the country.
Moreover, low consumption will reduce the country’s aggregate demand, which in turn will lower economic growth. According to the leaders of the Republican Party, the tax burden in the US is already too high to be increased. Thus, the best solution to the debt crisis is to reduce the government’s expenditure.
Classical economists believe that a market-based economy such as the US should be controlled by a small government in order to improve efficiency in resource allocation (Boyes and Melvin 153). In this regard, most of the services provided by the government such as education and health care should be provided by the private sector.
In addition, subsidies and grants to various sectors of the economy such agriculture should be abolished in order to ensure fair competition and to motivate private firms to improve their efficiency. The resulting reduction in government expenditure will reduce budget deficits in the next decade. Moreover, the savings made by reducing expenditure will enable the government to pay its debts without increasing taxes.
Finally, some economists and politicians believe that reducing government expenditure is the best way to avoid the imminent financial crisis in the US. This view is supported by the fact that maintaining the current level of expenditure will only increase the public debt due to the government’s inability to raise adequate tax revenue (DiPietro and Anoruo 410-419).
High public debt means that a large portion of the government’s revenue will be spent on paying interest rates. The resulting reduction in the number of funds that will be available for development projects such as the construction of roads and railways will hamper future economic growth.
Besides, public debt might become unsustainable, thereby forcing the government to default on its loans. This will reduce the country’s ability to access credit from the world economy. In this regard, the government has to reduce its expenditure in order to avoid the rise of public debts to an unsustainable level.
Arguments against Expenditure Cuts
The expenditure cuts introduced by the government may not achieve their objectives due to the following reasons. First, the Defense Department is the most affected by the reduction in expenditure. In particular, the department will have to reduce its spending by approximately 13% in the current fiscal year (Shear). In nominal terms, the department’s funding from the government will be less by nearly $40 billion.
Officials from the department have already stated that the reduction in funding will have significant negative effects on the country’s military. Concisely, Pentagon will not be able to fund most of its missions or programs. For instance, the flight hours for most of the warplanes in various missions have been reduced due to financial constraints (Shear).
Additionally, the Pentagon has had to cancel the maintenance of some of its equipment and to reduce the presence of the USA’s military in the Gulf region (Shear). Similarly, NASA will not be able to complete all its research activities due to limited funding.
The implication of these cost-cutting measures is that the security of the US will be under threat from external adversaries. Officials from Pentagon believe that reduced funding will lower the capability of the USA’s military to second grade (Wright). In this regard, terrorist groups from various parts of the world will get the opportunity to cause devastating attacks in the US.
Other countries or regions will also face serious security threats as the US reduces its military surveillance across the global. Unlike the US, countries such as China and Japan are increasing investments in their militaries (DiPietro and Anoruo 410-419).
This means that the US might lose its status as the country with the most powerful military in the world. Consequently, the political and military influence of the US at the international level will reduce. In light of these potential risks, the government will be forced to increase its expenditure on defense, thereby increasing public debt.
Second, the expenditure cuts will affect several state-funded programs and services that support thousands of poor and middle-income families. In the education sector, the government will reduce grants that enable students to access higher education in the country. In addition, all public universities will receive less funds from the government to support their research activities.
Consequently, the cost of higher education will increase, whereas public universities will lose their competitiveness as research centers. Overall, the quality of education in the country is expected to reduce. In the health care sector, the government will reduce its contribution to programs such as Medicare by between 2% to 9% (Shear).
The Center for Disease Control and Prevention is the most affected since the funds it normally receives from the government will be less by nearly $289 million. Consequently, the quality of health care in the country is expected to reduce (Shear). As the cost of accessing basic services increase in response to reduced government funding, the level of inequality in the country will increase.
Concisely, only rich people will be able to afford quality basic services such as education and health care. High levels of inequality will increase the level of dissent in the country. Consequently, social unrests are likely to become rampant in future. Given the adverse effects of social unrest on economic growth and political stability, the government will have to yield to the demands of the citizens by increasing its expenditure on public goods.
Third, the expenditure reduction strategy entails a significant cutback on jobs in most state-owned agencies. In the Defense Department, over 800,000 employees will have to work for fewer days in a week (Wright). This means that they will have to take unpaid leave for some days in a week. A similar strategy has already been implemented in most airports across the country.
The reduction in government spending is also expected to affect job creation in the private sector. Concisely, the companies that supply the government with various goods and services will not be able to maintain their current level of profits. Consequently, they are likely to reduce their workforce in order to maintain low operating costs and to increase their earnings.
President Obama has already warned that the expenditure cuts will lead to the loss of nearly 750,000 jobs in the medium-term (Shear). This will worsen the problem of unemployment, which the government has not been able to address fully in the last five years.
The IMF predicts that the expenditure cuts will reduce the growth rate of the USA’s GDP by 0.5% in 2013 (Shear). The Economics that underpin this prediction is that government expenditure and private consumption are key determinants of GDP growth (DiPietro and Anoruo 410-419). Thus, a reduction in government expenditure reduces economic growth.
Similarly, an increase in the unemployment rate as a result of reduced government spending leads to low consumption, which in turn reduces economic growth. In the financial and capital markets, investors use economic indicators such as GDP growth and unemployment rate to predict future returns. Generally, a reduction in GDP growth rate is associated with low future returns on assets such as common stocks (Boyes and Melvin 214).
Thus, a deterioration of the country’s economy will not only increase volatility in the financial markets but will also lead to capital flight as investors seek higher returns in overseas capital markets. Therefore, it will be in the interest of the government to increase its expenditure to spur economic growth.
The aim of this paper was to present arguments against government expenditure cuts that are currently being implemented in the US. The government implemented significant expenditure cuts in order to reduce its budget deficit and public debt. Even though the expenditure cuts are likely to reduce the debts, they will have adverse effects in the country.
These include the high cost of basic services, an increase in the unemployment rate, and a reduction in economic growth. Solving these problems will necessitate an increase in government expenditure in the future.
This indicates that expenditure cuts, as a strategy for reducing public debt is likely to fail. In this regard, the government should focus on increasing its tax revenue by supporting productive sectors of the economy. Additionally, cost-cutting measures should focus on improving efficiency and eliminating corruption in state-owned agencies rather than reducing funding.
Boyes, William and Michael Melvin. Macroeconomics. New York: McGraw-Hill, 2010. Print.
DiPeitro, William and Emmanuel Anoruo. “Government Size, Public Debt and Real Economic Growth: A Panel Analysis.” Journal of Economic Studies 39.4 (2012): 410-419. Print.
Shear, Michael. “Across-the-Board Cuts Take Effect, but their Impact is not Immediately Felt.” New York Times 2013. Web.
Wright, Ben. “Obama Signs Sweeping US Budget Cuts into Effect.” BBC News 2013. Web.