Analysis of Budget Deficit - Term Paper Example

Information Budget Deficit Introduction The term deficit simply refers to a situation where liabilities exceed assets, expenditures exceed income, losses exceed profits, or imports exceed exports. Generally, budget deficit occurs at governmental levels and this term could be defined as the amount by which government revenues fall short of government spending. The 2008 global financial crisis and subsequent recession caused many countries to close their fiscal period with a budget deficit, and its effects are ongoing. There are two different concepts associated with government budget deficit including primary deficit and total deficit. The primary deficit indicates the difference between short term government spending on goods and services and total short term revenues from all types of taxes and transfer payments while primary deficit plus interest payments on debt constitute total deficit. The government budget deficit comprises of two elements such as cyclical and structural. A high unemployment rate is observed at the lowest point of a business cycle; and this situation indicates that tax revenues are low and public welfare expenditures are high. Under such circumstances, governments are forced to borrow additional money from external sources. This deficit, realized at the low point of the business cycle is called cyclical deficit. Theoretically, governments will completely repay their cyclical deficit by the next cyclical surplus realized from the peak of the cycle. In contrast, the structural deficit has been defined as the deficit that remains throughout the business cycle as a result of excess level of general government spending over prevailing tax levels. This paper will identify the causes of and solutions for budget deficit. It will also analyze two countries that have experienced budget deficit over the last few years. Causes of budget deficits Generally, government budget deficits arise mainly as a result of two sets of causes. Firstly, structural factors cause government budget deficit and these factors are determined according to the special characteristics of the economy and its relationship with the external world. Secondly, implementation of thoughtless government policies may lead to sharp rise in expenditures. This situation would also directly lead to budget deficit. In some cases, it has been identified that governments lack essential fiscal discipline to control public sector spending. In contrast, governments may be often forced to increase public expenditures in order to maintain healthy income levels and employment rate when monetary measures indicate that the private sector is falling into recession. According to Morrison, the five major structural factors determining a budget deficit are “level of economic development, growth of government revenues, instability of government revenues, government control over expenditures, and extent of government participation in the economy” (Morrison, 119). The author argues that governments with lower levels of development are highly prone to budget deficit as they are pressurized to spend more on primary sectors like infrastructure and education and this condition may prevent them from effectively controlling their budgets. In addition, developing and underdeveloped governments may face issues like poor private saving and low tax revenues; this situation would probably persuade governments to raise their public sector spending rates to meet public expectations. Similarly, when a government experiences slow growth in revenues, it needs to treat its budget with deficit financing. Instability of government revenues indicates that the government may face difficulties associated with tax revenue fluctuations due to instable flow of income. To illustrate, export taxes will be the major source of revenue for petroleum export economies; and such economies are vulnerable to budge deficit troubles in case of any interruption in petroleum export. Inefficient budgetary systems often raise potential challenges to government as they cause difficulties to government in effectively controlling expenditures. In addition, the government may be forced to offer more subsidies and transfers to public organizations if it increasingly intervenes in the economy. This heavy governmental intervention will also add to administrative costs of price controls as well as interest rate controls. Ineffective budgeting process becomes one of the major causes of government budget deficit since an ineffective budget will not include well structured provisions for better control over public sector spending. Unforeseen contingencies like flood and earthquake may result in budget deficit because such situations will certainly force governments to deviate from their predetermined way of operations and to spend more on public sector in response to those calamities. In the opinion of Macdonald, a recession would most probably end up in a budget deficit as governmental spending may exceed the realized revenues during a recessionary situation (128). Solutions for budget deficit According to Baker, growth is the only real solution for budget deficit. Baker argues that it would be a cumbersome task for a country to balance the budget if that economy is struggling with a high unemployment rate; and in contrast, an economy can maintain a balanced budget without much effort if it has a strong employment rate. By saying this, Baker points out that employment rate is the most significant factor determining a government’s budget deficit or budget surplus. Baker also claims that stable economic growth assists a country to maintain high employment rate, trim down public sector spending and thereby eliminate the issues associated with a budget deficit. Increasing healthcare costs are identified to be some of the major threats to the maintenance of a balanced budget. It is evident that a country cannot cut down its healthcare spending as it is a basic necessity of people. Hence, developing a well structured healthcare system is the only possible solution to reduce healthcare costs. In other words, an effective and extensive healthcare system would aid an economy to lower the level of budget deficit risk. Since an increased unemployment rate greatly contributes to budget deficit, regulative employee hiring approaches may assist a country to overcome this issue. When a country reduces its foreign employee hiring practices or regulates its immigration policies, it indirectly benefits native workers as they get increased and extensive employment opportunities. Hence, immigration policy regulations are beneficial for an economy to improve its employment rate and thereby to promote balanced budgeting. In addition, spending cuts in athletics, arts programs, and technology are effective strategies to overcome budget deficit (CBS Pittsburgh). It is obvious that athletics and art programs do not notably contribute to the economic growth of a country and hence these expenditures could be temporarily trimmed down to allot more funds to reduce the difference between revenues and spending. Likewise, technological innovations are intended to enter the next growth phase. However, a country cannot deal with expansionary activities or enter next growth phase before stabilizing its current economic conditions. Hence, spending cuts in technology may greatly assist an economy to get stabilized and thereby to minimize the risk of budget deficit. Finally, a country may cut down its defense expenses to a certain extent as an attempt to eradicate its budget deficit troubles. Similarly, tax hikes would help an economy to overcome the budget deficit issues. It is clear that tax hikes will directly lead to an increase in government revenues as people pay higher tax for the products and services they consumed. At this juncture, the government can use the additionally charged tax amounts to effectively resolve the issues associated with revenue shortfalls. In other words, the tax hike policy may be helpful for an economy to shorten the gap between revenues and expenditures. However, the government has to ensure that tax hikes are not applied on necessity goods and services, because such a practice would negatively affect public expectations. In order to overcome the budget deficit problems, government must increase its spending on various business sectors including manufacturing and export. Statistical data reflect that sales tax revenues constitute a significant portion of the total government revenues. Hence, a government can increase its revenues from sales taxes through providing financial subsidies and other concessional packages to the country’s business houses. In addition, the government must identify the potential export trade sectors of the country and design promotional packages for the promotion of those sectors so as to increase its earnings from export duty. High interest rates would be one of the most effective monetary tools to maintain balanced budgeting. The high interest rate may influence people to invest their excess money with banks and this situation enables banks and other financial institutions to extend their credit lending facilities to different productive sectors of the country. In short, high interest rates would enhance circulation of money across the market, which in turn would lead to the economic growth of the country. In addition, it is recommendable for a country to borrow money from abroad on a long term basis to meet its funds shortage. The borrowed money can be used to increase money supply across the country and to boost its business sectors. In total, it is advisable for countries to adopt appropriate monetary policies on time that would promote effective money circulation. US budget deficit The US deficit for the fiscal year 2011 topped $1.2 trillion for the third consecutive year and it was the second largest figure ever according to the US Treasury. The Treasury reported that the US deficit for the accounting period ended on September 30 indicated the figure $1.299 trillion. The US deficit reached a record of $1.412 trillion in 2009 while it came down to $1.293 trillion in 2010. According to United Press International, Inc, the current budget deficit is $347 billion less than the White House expectations. Financial analysts point out that US revenues increased by $141 billion and the spending by $145 billion when compared to 2010 annual financial statements. Lew, director of the White House Office of Management and Budget stated that “this report confirms that we cannot waste any time in jump-starting economic growth and job creation to lay the foundation for a stronger economy and lower future deficits” (Lew). While analyzing the Federal budget deficit, it seems that the US government is vehemently trying to increase its revenues through various monetary policies including interest rates. As a result, the country could improve its revenues by $141 billion as compared to the previous financial year. However, the government’s public sector spending increased since the country had not taken any specific measure to trim down its expenditures. Hence, the US government has recently formulated different spending cut strategies together with revenue improvement tactics. Obviously, the US economy has not yet overcome the budget deficit issues. Australian budget deficit The Australian Federal government reports that the country realized a budget deficit of $27.1 billion for the fiscal year 2008-09. This deficit was $5 billion less than expected amount of $32.9 billion because the country could achieve a better-than-expected spending rate. In addition, the government net debt rate was also better as compared to the previous year’s financial outcomes. According to the Treasurer Wayne Swan, “the stronger than expected final budget outcome does not substantially diminish the fiscal challenge imposed on Australia by the global recession” (They Sydney Morning Herald). In order to overcome the budget deficit, the government has planned comprehensive strategies in the Australian Federal Budget 2011-2012. This budget aims to enhance the national economic growth and thereby improve the total volume of revenues by recruiting and training people for more rewarding jobs. The Australian Federal government also plans to take advantages of the seismic shift in the global economic power, because this change greatly benefits the country to influence the economic growth in its Asian region. In its Federal Budget 2011-2012, the Australian government has given first priority to spending cuts so as to ensure adequate inflow of revenues. In addition, the government has planned a range of policies to improve employment rate and export trade activities with intent to ensure sustainable growth. According to Swan, the Deputy Prime Minister and Treasurer of the Commonwealth of Australia, the country’s policymakers also specifically focus on monetary policies which may ease inflation pressures. However, budgetary forecasts indicate that Australia still needs to wait for 2-3 years to achieve a budget surplus. Works Cited Baker, Dean. “The only real solution for budget deficits: Growth.” The Guardian. (10 May 2011). Web. 15 December 2011. CBS Pittsburgh. “North allegheny reviews possible solutions to budget deficit.” (21 April 2011). Web. 15 December 2011.   Lew, Jacob. “U.S. deficit increased to $1.3T in fiscal 2011.” Bloomberg. (15 October 2011). Web. 15 December 2011. Morrison. “The Budgetary Process and Budget Deficits.” Howard, Michael (Ed). Public Sector Economics for Developing Countries. Kingston: University of the West Indies Press, 2001. Print. Macdonald, Nadia Tempini. Macroeconomics and Business: An Interactive Approach. UK: Cengage Learning EMEA, 1999. Print. The Sydney Morning Herald. “Australian budget deficit $27.1 billion.” (29 September 2009). Web. 15 December 2011. Swan, Wayne. “Budget speech 2011?12.” Australian Government. (2011). Web. 15 December 2011. United Press International, Inc. “2011 U.S. deficit is $1.3 trillion: US News.” (15 October 2011). Web. 15 December 2011. Read More