High Deficits

This paper will answer many questions involving high budget deficits. The questins that will be answered are why doEconomists generally agree that high budget deficits today will reduce the growth rate of the economy in the future, Do the reasons for the high budget deficit matter: does it matter whether the deficit is caused by lower taxes, increased defense spending, more job-training programs. Also, in my paper I will attempt to figure out what role that the fiscal and monetary policies have to lead to higher or lower budget deficits. In addition, I will find out How budget deficits affect overall long-term economic growth and the debt that the U.S. has to contend with

Budget deficit is a situation where the amount of money being spent is more than that coming into the economy. In the context of the federal government spending, it can be synonymously referred to as the national debt. Therefore, it results when the total amount of money needed to fund the nation's program over a given financial year is more than what is expected and currently saved. This forces the country to borrow funds so as to fill the deficit. When the budget deficit only lasts for a short period of time, then it can be used to jumpstart an economy that has been weak. However, the situation can be detrimental if it exists for a long time. For example, when a nation has to borrow money to fund its projects, this amount has to be paid back with interest. This can worsen the deficit (Baumol, 2011).

The reasons that cause a budget deficit are very important points of analysis. Moreover, they enable the concerned parties know which sectors to correct in order to return to a stable economy. First, a deficit in any situation simply shows that the nation is not saving the required amount of money to sustain itself. This is because the amounts realize from national savings are from subtracting the budget deficit from the private savings. When federal deficit rose by approximately 6% in the period between 2000 to 2003, means that the rate of savings over those years reduced greatly. National savings matter in the economy because it will affect the rate at which the country accumulates assets and real estate. The future economy has its fundamental inclining to the profits that are realized from these investments. Therefore, when there is a large national deficit, this means there is a very low degree of savings by the national population. This creates lesser cash flow in future than there is currently. This means there will be less income for people and others may even lose their jobs (IMF, 1993).

Fiscal and monetary policies are very important in determining if there will be a budget deficit or not. A fiscal policy is a government policy that affects national spending on substances consumed by the nation. On the other hand, a monetary policy is one that is influenced by the government so as to cause changes in the supply and demand of money. These include varying interest rates and changes in the availability of treasury bonds. It is said that if the federal government assumes the major policies and does not carry out any changes, the current deficit could rise to 5 trillion US dollars in just a period of ten years. Fiscal policies like increasing government expenditure to levels above those that the country can produce in its normal Gross Domestic Product (GDP) have negative effects on rates