US Budget Deficit (Research Paper Sample)

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US Budget Deficit
A budget deficit occurs when the government spends more than what it collects. The government predominantly collects funds through taxes, and it spends the collected funds by paying salaries, financing aid programs, defense spending, and other cash outflows. If the government’s expenditure exceeds its collection, a budget deficit occurs. In the United States, federal spending has soared over the last few years leading to a huge budget deficit. Most experts blame the current budget deficit on the 2008 financial crisis; the economic stimulus package, which was launched by President Obama upon his election; and the 9/11 attack which led to increased military spending because of the war on terror. This paper intends to discuss some of the arguments for and against the current U.S. budget deficit.
A consistent budget deficit can affect the economy negatively in a number of different ways. For instance, the current U.S. budget deficit can lead the crowding out effect. When a budget deficit occurs, demand for loanable funds increases because of increased government borrowing. Consequently, the government starts competing with the private sector for a share of the available funds to finance is deficit spending. This leads to a rise in the interest rates, and as result, private investment spending declines leading to a slower rate of economic growth. Reduction in private investments also leads to a less efficient use of a nation’s resources, and this further reduces the economic growth.
In addition, increased government spending deficit can also have a negative impact on the nation’s international trade deficit. Increase in domestic interest rates because of the increased government borrowing leads to a rise in the return on the country’s financial assets. Consequently, the demand for the nation’s financial assets rises, leading to an increased demand for dollars in the foreign exchange markets, and as a result, the dollar appreciates at a greater margin compared to other currencies. As the dollar value increases, the nation experiences a reduction in its net exports, and a rise in the net imports, leading to an increased trade deficit (Swlearning.com, 1).
Another danger of operating a budget in red is that it can lead to inflation because of debt monetization. The Fed can decide to print new money for purchasing government bonds held by the private sector. This replaces the debt from the private sector with money. When the money is used in paying for goods and services, inflation can occur. Moreover, the current budget deficit if not addressed, can leads to an increase in the national debt. This was the case in 2011, when the national debt rose almost to the $15 trillion mark. Consequently, the U.S congress was compelled to raise the debt ceiling.
Despite the above perceived negative impacts of the current U.S. budget deficit, it is worthwhile noting that deficit spending enhances economic growth because of increased investment level in the private sector, an effect known as crowding in. Furthermore, if unfortunately the economy enters into recession, deficit spending through the pu...