Fiscal condition of the federal government today - Essay Example

The US financial crisis threatens not only its constituent states but also the world at large. The crisis has been around for some time. It started slowly with fears of the worst since 2003. As the years progressed, the fears came to pass with the present financial status leaving more to be desired in the financial markets.The last six months have demonstrated financial volatility (not only in US but world over) that has never been witnessed may be since the great depression (O'Connor, 2001. pp.10-15). This paper seeks to evaluate the present fiscal condition of the US federal government with emphasis on the causes of the crisis and an exploration of the effects of the crisis on both the public and private domain.

The federal government fiscal crisis is echoed by the serious struggle by the states and local governments through unfathomable and prolonged fiscal crisis which has since spread from the federal government to haunt them. The states', not mentioning the federal government's, revenues are declining sharply or if they are growing, then this growth is indeed very slow to be noticed. This is made worse by the federal government out spending its revenues. The crisis is likely to continue unless some quick and informed remedial measures are not taken.

According to the 2002 financial year report, as at September 2003 the federal government had more than $1 trillion reported assets with slightly more than $8 trillion in liabilities leaving $7 trillion accumulated deficit with a reported $365 billion operating deficit and a $158 billion unified budget deficit. The projection by the general comptroller and CBO was that the situation was headed for worse with the unified budget deficits likely to hit $401 billion and $480 billion in 2003 and 2004 respectively.

This means that there was no hope in 2002 and the situation was expected to worsen with time. 2008 was recorded the climax of the financial market redundancy and thus you can imagine the situation in 2008 if it is worse than the figures projected for 2003 and 2004. The 2008 was marked with acute financial crisis with the financial market feared to be headed for a clash. The cause of the situation was immediately credited to the borrowers who were at the verge of insolvency and thus pulling down the lenders.

These borrowers include the auto industry which has since received $15 billion bailout. Based on this insolvency, most lenders declined to lend thus affecting the mortgage industry and the stock market. Apart from the cause mentioned above, the other causes of this sticky financial crisis may be traced down to the weakening economy, the 1990's tax cut policies taken by the federal and state governments, sharp decline in stock markets, and the structural anomalies in the state and federal government tax systems among other seen and unseen causes.

Focusing on policy, it is common knowledge how federal policy can impact state finances. Since the 1990's, the federal government set policies to provide subsidies to the state and local governments. The subsidies were to be provided because the federal government asked the states to reduce the cost of taxes on the taxpayers. This tax cut was later to haunt the federal government. The federal government also exempted interests on bonds from the federal taxation. Another tax policy is the fact that the federal government managed the entire estate tax and shared the tax revenues amongst the states.

The 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) came with a counter- cyclical fiscal relief or subsidies for the states. The fiscal relief amounted to $20 billion over 2003 and 2004. The fiscal reliefs to cover the tax cuts instituted by the federal government ate significantly into the federal governments financial reserves. This together with the ever increasing demand for better Medicaid and Medicare funding thoroughly utilized the federal finances. The percentage allocation for Medicaid, Medicare and other social welfare programs increased to more than 60% raising concern