Question

Solve the current Federal budget deficit problem. Using good judgment, understanding of macro- and micro-economics and politics and other views to make choices regarding budget cuts and tax increases to try to solve the budget problems facing our country. Also discuss how it may have affected views of the current Federal debt crisis.

Answer 1

Hi,

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Question:

Answer:

Current Economic outlook of the USA:

Economic indicators	2020 (CURRENT UPDATED)
GDP	-5.9%
INFLATION	0.62%
UNEMPLOYMENT	11.1%
GDP-DEBT RATIO	82%
FISCAL DEFICIT	4.6%
CONSUMER CONFIDENCE INDEX	92.66
INTEREST RATE	0.25%
INDUSTRIAL GROWTH	-12.70%

Budget deficit = 4.7% of GDP

This time the world is facing the COVID-19 crisis. All the major economic, social and political activities are affected worst. Economy is fallen down sharply and million of people has lost their jobs. Thousands of companies has been bankrupted or facing a serious financial trouble. Other side because of Coronal virus thousands of people lost their lives and million of people are corona positive. The USA is the most affected country of the the world. This time USA economy is facing a very serious problem after 2008-09 crisis. The major macroeconomic indicators are very week.

This time the budget deficit of the USA is 4.7% of GDP that is not a good sign for economy. A high budget deficit harm the economy badly. This time at a lowest level of interest rate consumer confidence is very low. People do not confident about the future projection about the economy. Both the consumers and investors are very worry about the future. Normally, as per the economic theory and concept government should adopt a expansionary fiscal and monetary policy. Government should increase the spending that will increase the income level and also cut tax that will also increase the disposable income of the tax payer. Both the tax cut and increasing spending will boost the aggregate demand that will increase the GDP growth and price level. Other side increasing government spend also creat a positive environment in the economy and also boost private invest and also increase production that increase employment level and income level.

Here if government increase the tax rate or budget cut then it will harm to the health of the economy. It will decrease the aggregate demand in the economy that will decreased the GDP and price level also. Other option is external borrowing. This time GDP-Debt ratio is 82% that is a reasonable figure for the advanced economy like the USA. but it can increase the interest burden on the economy but i think it is a better option than tax cut or budget cut. On this the government can do is, it can increase tax on the wealthy people. In this situation government can increase tax for the wealth people by a certain and reasonable level.

But if government have only these two options (tax increases  and budget cut) then i will suggest for tax increase instead of budget cut. This time the USA is not facing a serious economic problem, its also facing a medical emergency and high unemployment so government should increase spending on it for maximizing social welfare. Or in simple term, government should increase spending on social security schemes. Interest rate is very low so, increasing tax burden will not affect more and people should pay increased tax to support the economy. When government will increase tax then it will increase the government revenue and help to decrease the GDP-Debt burden. So, it will also helpful in relaxing the current debt crisis.

Thank You