The US National Debt - Research Paper Example

U.S. National Debt Public/national debtis the amount of money owed by the nationalgovernment. Public debt is measured in terms of the unpaidTreasury securities issued by the Treasury as well as government agencies. Gross national debt comprises of: Debt held by the public: forinstance securities held by privateinvestors (individuals and corporations), localgovernment, foreign states and Federal Reserve System. Debt held by government accounts(intragovernmental debt) Generally, public debt reduces due of tax and other receipts and increases due to government spending. The debt fluctuates in the course of the year.Public debt is one way of financing the operations of the government. It is not the only way;government can generate revenue using other means such as raising of taxes or money creation. Federal governments borrow through issuing government bonds,securities and bills.In other nations government can borrow direct from organizations such as World Bank or other international institutions (Michael S.Weisbach). Only public debt is indicated as a liability on theUS federal government’s consolidated financial statements(Thornton). Debt held by federal government accounts is treated as an asset to those accounts however it is treatedas a liability to Treasuryaccount; the valuecounsel out each other in the consolidated financial statements.Federal governmentexpenditures and receipts are presented on a cashnotaccruals basis. However, the accrual method may provide useful data on long term effects of the governments annual operations. The US national debt is expressed as public debt ratio to GDP(gross domestic product). The debt ratio to GDP may decrease due of gross domestic product, government surplus or inflation (Alycia Chin). Deficitis thedifference between receipts and outlays for each year.US government generates revenue from excise, income, social insurance taxes and fees.The income generated is spent on service provision, social security, and research and debt payment. Deficit arises when spending exceeds income level. In such a case the government must borrow in order to pay its bills. Publicdebts differ from deficit in that public debt is the accumulated deficit plus off budget surpluses. Items included while calculating deficits are considered as either off-budget or on-budget.Governments borrow money needed maintain government operations. It borrows money by selling securities such as bonds, treasury bills, notes and savings bonds to the public. Treasury securities sold to the public and Intragovernmental Holdings amounts to total debt. Historically, US national debt has increased during recessions and wars, and declined subsequently. The debt ratio to GDP may decrease due of gross domestic product, government surplus orinflation. However, rising cost of healthcare and aging demographics led concerns about sustainability of the governments fiscal policies (S.Feldstein).The current public debt is approximately $12.8 trillion or which is74% of Q1 2014 GDP. Intragovernmental holdingsamounts to $5.1 trillion (30%), resulting to a total public debt of $17.9trillion (103% of Q1 2014 GDP. Approximately 48% of the national debt is owned by foreign investors, from Japan and China at about $1.2 trillion and $1.3 trillion respectively. Year 2014 will be $506 billion, CBO estimates, approximately $170 billion lower than last year’s deficit. United States has had a fluctuating public debt for the past several years. National debt expressed as a percentage of GDP reached its highest level during and after the Second World War but fell rapidly thereafter. Debt expressedas a percentage of GDP has increased consistently since then, except in the era of Bill Clinton and Jimmy Carter . The graph below shows US historical debt outstanding Y 18 16 14 12 10 8 6 4 2 01994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 From the above table it is evident that the national debt has almost doubled since 2009 when president Barrack Obama took office. The debt is projected to increase by the same rate in the next decade. US federal public debt expressed as a percentage of GDP, from 1994 to 2014 100 75 5o projections 25 o year With the current trend, US national debt is likely to increase in the next two decades. CBO report of February this year shows that deficits are projected to return to historical average depending on economy size (GDP) by the end of this year. CBO estimate that within current law, the deficit would be 3.0% GDP or $514 billion in the economic year 2014. Deficits would again rise slowly up to 2024 due to rising cost of health per individual and pressures of the aging population. Theratio of debt to GDP ratio would remain stable for a part of the decade then rise again towards the end of 2024 that is: from 74% to 79%. US Federal Deficits since the year 1994 expressed as a percentage of gross domestic product. 10% 8% Projected figures 6% 4% 2% 0% 2% 4% The US federal government does not always run a deficit. Deficits increased steadily from 2003 up to 2010, and then begun declining. Projected deficits will increase later in the next decade, this is due to rising cost of healthcare services and pressuresfrom an aging population, these will expand federal subsidies on health insurance, andincreasing interest rates on federal debt. From the curve it is clear that as the deficit decreases the debt increases. This is because federal government needs money to pay its’ bill. US current debt is approximately $12.8 trillion.48% of the amount are owed to foreign investors while the rest is owed to local investors: Federal Reserve System and individual household.US total Federal debt has crossed $15 trillion, the size of thebiggest economy in the whole world. Although US debt has is equivalent to 100% of gross domestic product(GDP), othereconomies have debts which are greater than their GDP. These include countries in the European Union Germany,Greece,France, Italy and Spain. Countries with a substantial public debt are vulnerable to high interest rates, which consume a significant part of national revenue when rates rise. While this is happening in Italy Greece, and Germany, US interest costs have remained low. Although federal revenue and spending is largein relation to other countries of the world, US still have the largest economy in the world. It’s only European Union members who have a combined economy that can be compared to that of United States. In this period of great public debt critical decisions must be made in regard to spending and payment of debt. This will help to prevent deflation of the US economy. In order to balance the US budget, I recommend the following: a) Cut Spending US government should cut some expenses. Some expenses are ridiculous.US troops should be brought back home to defend the nation. This will keep on terrorist from our land. Amount spent on social security, Medicaid and Medicare, and other welfare programs should be reduced(Miller). To reduce debt owed to other nations, US should have its citizen’s work for them to pay back the debt. These citizens should be rewarded once they come back home. A program should be introduced to help homeless Americans find job so that they can start paying taxes. b)Raise Taxes In order to generate more revenue, the government through its various departments should raise all forms of taxes. Increased taxes will increase income and reduce deficit as well as accumulation of national debt. This tactic can be effective only when the amount spent by the federal government remain constant. Interest Rates Manipulation US government should maintain low interest rates in order to stimulate economy, generate revenue and taxes and in return reduce national debt.Low interest rateswill make it easy households and for individuals to borrow money. The money borrowed will be used to purchase goods and services which will generate revenue through taxes and create jobs. Reducing interest rates will reduce the deficit through increasing revenue. Income expenditure model showing the impact the plan will have on the GDP 25 A 20 -$ 4 AE1 15 B AE 2 10 5 0 5 10 15 20 25 Real GDP per year KEY AE1-Aggregate expenditure before the planAE2-Aggregate expenditure after the plan Y axis-Aggregate expenditurein trillion dollarsX axis- Real GDP per year in trillion dollars. A-Original equilibrium pointsB- New equilibrium points Increase in autonomous tax shifts the curve of aggregate expenditures downward by an amount that is equal to the initial change in consumption at the original equilibrium value of real gross domestic product in the aggregate expenditures model, $4 trillion in this case, assuming no other change in aggregate expenditures. It decreases the gradient of the aggregate expenditures curve and thus reduces the multiplier. In addition a reduction in autonomous tax shifts the aggregate expenditures curve upward by an amount equal to the initial increase in expenditure created as a result of reduction in tax. This also increases multiplier value. In the above model increase in tax rate shifts the aggregate demand curve to the left by an amount equal to the initial change in aggregate expenditures induced by the tax changes the new value of the multiplier. Decrease in government spending on goods and services decreases aggregate demand. This results in low GDP and price level. Decrease in aggregate demand results in decrease in aggregate supply as shown by the curve below. AS1 Y AS2 AD KEY X axis-Price LevelY axis- Real GDP A-Original equilibrium pointsB- New equilibrium point. AS1 – Aggregate supply AD –Aggregate demand A serious measure need to be taken to help reduce the amount of Federaldebt. Report by CBO shows thatamount of public debt is likely to increase in the next decade. If this continues US is likely to suffer from economiccrisis. Increase in debt shows that there will be increase in unemployment level and other societal problem. If no action is taken public debt will be greater than GDP and this will lead to economic deflation References Alycia Chin, Taya R. Cohen. "The National Debt in the 2012 U.S. Presidential Election." Analyses of Social Issues and Public Policy (2012). Michael S.Weisbach, Woo Kim. What determines the structure of corporate debt issues? 2007. Thornton, Daniel L. "The U.S. Deficit/debt Problem: A Longer-Run Perspective." Federal Reserve Bank of St. Louis Review (2012). Miller, Matt. "Financial Executive." Concern over the rising U.S. Debt.(Washington insights) (1st Aug 2014). S.Feldstein, Martin. Preventing a national debt explosion. Cambridge, Mass.: National Bureau of Economic Research, 2010. Read More