An Assessment of the Impact of Government debt and Deficits on the Economic Growth of United States - Essay Example

An Assessment of the Impact of Government debt and Deficits on the Economic Growth of United s Introduction The economic growth of any country is regarded as a multi-variance system. The reason why this is so, is that the economic growth of a country is not determined by only one factor (Dessler, 2007). The couple of factors not withstanding, one key element that cannot be eliminated in the determination of the economic growth of any major country such as the United States is the public debt and deficit of the country. Seater (2012) explains that for every government, “the magnitude of the outstanding debt equals the cumulative amount of net borrowing that the government has done.” Subsequently, it would be noted that deficits set in as the addition of the debt in the current period; be it quarterly, monthly or yearly (Seater, 2012). Because the general growth of the economy of a nation is largely dependent on the average that it strikes between the size of its gross domestic product and debt, the aim of the present paper is to critically review the relationship that exists between the present public sector debt and deficit of the United States and the country’s economic growth by the use of credible sources of academic data. The pattern in debt and deficit, and growth in real GDP A number of statistics exist from highly authentic sources pertaining to the history of the United States public debt from 1998 to date. A critical review of the statistics show a pattern that can best be described as worrying. From table 1.1, it can be seen that there has constantly been an increase in the debt portfolio for all years except one, which was the year 2000. Remaining data on the debt are quantitatively given below. Table 1.1 Public Debt of the United States from 1998 to 2012 Year Public Debt in $billion Percentage increase 1998 5,478 1.0 1999 5,605 0.8 2000 5,628 -2.1 2001 5,769 0.2 2002 6,198 5.5 2003 6,760 6.2 2004 7,354 5.7 2005 7,905 3.7 2006 8,451 3.4 2007 8,951 3.6 2008 9,654 5.0 2009 10,413 5.5 2010 11,875 12.5 2011 13,178 10.97 2012 16,204 22.9 Source: United States Federal Budget (2012) From table 1.1 a very disturbing trend in seen in such a way that all governments over the years have not showed greater commitment in reducing the quantum of public debt that the country owes (Gilpin, 2002). Subsequently, the deficit of the country keeps rising by the day (Held, 2010; Wolinsky, 2005). Even though there are years when the percentage increase shows a downward trend, they still represent increase in the quantitative debt ratio because the percentages are positive. It must be emphasized that it is only when the percentage increase is negative that there has been a quantitative reduction in the debt value. The figure below gives a graphical representation of the trend of percentage increase of the public debt of the United States since 1998. Figure 1.1 Percentage Increase in Public Debt of United States Source: United States Federal Budget (2012) Indeed, the public debt of the United States has had a telling effect on the gross domestic product of the country over the years. This is because for most of the years, the gross domestic product of the country has not seen any growth beyond the percentage increase of the national debt. What this pattern means is that for as long as there would be increases in the national debt, there would be corresponding stagnation in the economic growth of the country. The figure below is a graphical representation of the relationship between the percentage increase in the national debt and the percentage increase in the gross domestic product of the United States. Figure 1.2 Relationship between national debt and gross domestic product percentage Increase for United States Source: United States Federal Budget (2012) The chart also shows that for most of the years, the national debts increase by higher percentages than the gross domestic product. Reasons for current debt and deficit Basically, the public debt of the country refers to the borrowings that the government does outside of the national budget (Huntington, 1996; Tombak, 2012) whiles the deficit refers to the amount of funds spent outside revenue generation. As seen above, an increasing pattern in the growth of national debt and deficit affects the economic growth of the country greatly because it stagnate the growth of the gross domestic product (Mearsheimer, 2001). Many have wondered why the debts and deficit have evolved in the pattern in which they have in the figure. First, experts blame misplaced national priorities as the major cause of the national debt size of the country. This is said in terms of spending more on non-revenue generative ventures (Waltz, 2010). Secondly, the United States have been blamed for taking up upon itself more responsibilities that it can take than the country can actually afford in the face of the international world. To this end, the country always has surpluses to deal with in its national budget. Finally, government social intervention policies are greatly blamed. Currently, statistics has it that Medicaid and Unemployment benefits alone could raise more than 12% of the size of the GDP if there were other viable means of ensuring that such interventions could be adjusted into proponents of revenue generation and empowerment for the populace (Mahar, 2009). Relationship between government debt, deficits and economic growth From the discussions so far, it can be seen that there remains a lot that the government ought to do in terms of its fiscal behaviour. Basically, the attention of the government has been drawn to the fact that increase growth in the national debt volumes would continue to affect the GDP growth negatively (Redman, 2003). Subsequently, government spending needs to be reviewed using some of the world’s most viable models. For example, the budget needs to be made one of a revenue generation budget rather than debt incurring one. This can easily be done if government makes provisions to empower each and every other citizen to become income generative. For example, instead of paying unemployment benefits, government should invest in employment creation so that people who acquire new jobs could also contribute to the economic basket through the payment of taxes. Moreover, the government should have ways of widening the tax net to reach out to more and more employers and employees who in one way or the other escape the payment of tax. Once this happens, there will be lesser need to depend on borrowing and the public debt would significantly reduce. How US manages the volume debt In modern principle, the best way to manage debt has been identified to be a conscious effort to reduce the increment of the debt all together. Indeed with America raising its debt ceiling, this cannot be said to have been done. This not withstanding, the government continues to make certain striving efforts in managing the volume debt. For example, taxes on the rich and well to do have been raised to what has come to be known as the Eisenhower-esque rate (Moynihan and Henry, 2006). With this, enough funds are raised to pay off some of the debts. The country also embarks on a lot of foreign direct investments as a business component of the government budget. With this, the government business portfolio is able to raise huge incomes from these foreign investments, most of which hare located in developing countries, which have showed signs of competence global marketing. Conclusion In conclusion, it will be reiterated that government debt and deficit has a direct bearing on the economic growth of that country. The linkage exists in the sense that collection of data so far has showed that continuous increase in public debt and deficit affects the growth of the gross domestic product directly. Meanwhile, the economic growth of any country, including the United States is directly proportional to the nominal gross domestic product of that country (Stanton, 2005; Moynihan and Henry, 2006). What could be left now is a massive approach that looks at the way forward in ensuring that the budget of the country becomes revenue oriented one rather than a debt driven one. Such revenues can only be assured if there are concrete measures to create more job openings so that there will be more tax payers to increase the income base of the country. REFERENCE LIST Dessler, D., Kratochwil, F. V., & Mansfield, E. D. 2007. What’s at Stake in the Agent-Structure Debate. International Organization (pp. 441-474). New York: Longman Gilpin, R. 2002. War and Change in World Politics, Cambridge: Cambridge University Press. Held, D. 2010. Cosmopolitanism: Ideals and Realities. Polity Press and Blackwell: New York. Huntington, S. P. 1996.The Clash of Civilizations and the Remaking of World Order, New York: Simon and Schuster. Mahar, M. 2009. The Real Reason Health Care Costs So Much Medical Care. Money-Driven Medicine: 41(1): 142-52. Mearsheimer J. J. 2001. Tragedy of Great Power Politics New York: W. W. Norton. Moynihan R and Henry D 2006. The Fight against Economic Mongering: Generating Knowledge for Action. 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