Reduction of Federal Budget Deficit
Author
Institution

United States federal government has run deficit budgets in 36 out of the last 40 years. A deficit budget occurs when government spending exceeds the total taxes collected. The government of the day has to borrow either internally or externally to fund the debt. Budget deficits are not necessarily bad because they accelerate economic growth (Alesina & Ardagna, 2010). However, debt increases beyond certain levels impact the economy negatively. For instance, high government debt implies that the savings generated in the economy will be used to repay the debt instead of being invested in development activities. High interest costs created by huge debts discourage work and savings are reduced. US annual debt currently stands at 7 percent of gross domestic product compared to the general average of 3 percent of GDP. This paper suggests different policy options that should be undertaken to reduce the budget deficit by 2.5 trillion US dollars over the next 10 years. Some of the policies relate to reduce spending while others relate to increase taxes.
By applying the following measures, the federal government will be able to reduce spending by 940 billion dollars, increase revenue by 1561 billion dollars and eliminate 2.501 trillion dollars from the federal budget deficit. By increasing taxes on alcoholic beverages by 40, cents on a fifth of liquor and 50 cents on a six-pack of beer or a bottle of wine, the federal government will increase revenues by 63.8 billion dollars. Eligible business owners should pay Medicare/social security taxes based on both their share of firm’s profit and their personal income. This action will help the government raise revenue by 129 billion dollars. An increase of corporate tax rate by one percent will lead to 113 billion dollars increase in national revenue. A repeal of certain tax preferences for gas, oil and mining industries would increase tax revenue by 33.8 billion dollars. Special deduction offered to some production activities should be repealed to reduce spending by 192 billion dollars (Bartel & Davenport, 2014).
The federal government should impose an annual fee on large financial institutions, and this would help raise 64.4 billion dollars. The terms for federal gas and oil leasing, including expansion of offshore drilling should be changed, and this act would reduce the deficit by 5.9 billion dollars. Federal insurance premiums that are paid by employers should be increased to cut the deficit by 5.3 billion dollars. An increase in excise tax on cigarettes to 1.51 dollars a packet would increase revenue by 37.4 billion dollars. Ford class aircraft carriers used by defense should stop being build to cut on spending by 10.2 billion dollars. Development of a new long-range bomber should also be deferred. Pell grants should be limited to the neediest students to cut on spending. Retirees who had higher earnings should have their social security reduced. Highway funding should be limited to revenues from fuel taxes and other road related taxes. If this were done, spending would reduce by 64.5 billion dollars (Bartel & Davenport, 2014).
The different policies described above have economic benefits and tradeoffs. Limiting funding of highways to user fees has many economic benefits. Some of these benefits include reduction in government spending, reduction in air pollution, reduction of congestion on major highways and promotion of wiser infrastructure investments. The limitation associated with this policy is that less fuel would be consumed. Individuals who own cars would prefer using public means and thus leaving their cars at home. An increase in corporate taxes by one percent will lead to several economic benefits. The national government will raise more finances and thus reduce the government deficit. However, the effect of an increase in corporate taxes will mostly depend on the timing. During recession, spending would decrease significantly but during boom, spending would not be affected much. The tradeoff of increasing corporate taxes is that investment spending can decrease significantly. Investors would cut their investments and this will decrease their earnings. The economy can also be affected if the decrease in investment spending is significant.
Increase of excise tax on cigarettes and alcoholic drinks have the economic benefit of increasing revenue and thus lowering budget deficit. The expectation would be that consumption of these products would not be affected by the increase. In reality, however, increase in this taxes will cause a reduction in consumption thus lowering the level of spending in the economy. This policy will affect both the users of these products and the producers. The consumers will be forced to take less of the products due to the high prices. The companies that produce these products would also be affected because demand for their products would be affected negatively. If the impact is significant, it may affect economic growth in the end. There are several economic reasons why budget deficit should be decreased. An increase in public debt beyond certain levels implies that most of the countries savings will be used to pay interest costs. When debt levels are high, the country’s savings are used to pay the debt instead of developing the economy. This leads to slow economic growth (Bussiere, Fratzscher & Muller, 2010).