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Fiscal Policy
Introduction
Fiscal policy entails controlling government spending and tax regime by a central government. This is utilized in stabilization of business cycles, reduction of unemployment and inflation, and encouraging economic growth. In the US, fiscal policy is principally implemented at the federal level via acts of Congress as well as presidential actions. However, local governments and state also implement fiscal policies to stabilize their domestic local macro-economies. In the government sector, there are three optional tools in the employment of fiscal policy. These tools are government procurement, transfer payments, and taxation. A substitute to fiscal policy is the monetary policy. The fiscal policy is founded on the assumption that aggregate expenditures, particularly business investment, are the key sources of business-cycle volatility. The means of rectifying this instability is as a result realized via aggregate expenditures. The objective of fiscal policy is to influence aggregate expenditures, and consequently the macro-economy, directly through government procurement or indirectly through taxation and transfer payments.
US FISCAL POLICY
In regard to the U.S. fiscal policy, the sluggish pace of economic recovery and fragile job creation, in spite of the broad margin of surplus capacity, argues for sustaining supportive fiscal and monetary policies in the near term. In reality, the expansionary fiscal policy played a vital role in forestalling a deeper recession in the U.S. In reference to IMF analysis, the fiscal measures contribution to GDP growth was approximately 2% points in 2009 and an additional one percentage point in 2010. In the same period, the public held federal debt rose from approximately 36% of GDP in 2007 to approximately 62% of GDP in 2010. In the absence of remedial measures, and considering fundamental fiscal pressures predating the predicament, debt might reach approximately 95% of GDP by 2020. In the absence of policy adjustments, consequently the debt would continue rising (Bureau of Economic Analysis, News Release, 1/27/12). It is in this perspective that, the necessity for urgent measures to secure medium-range fiscal sustainability appear to be patently obvious.
Current GDP Growth in the US Economy. According to the Bureau of Economic Analysis (BEA) advance estimate, the real GDP, meaning the output of services and goods produced by property and labor in the US, increased at a yearly rate of 2.8% in the last quarter of 2011. In the third quarter, the real GDP had increased 1.8%. Increase in real GDP in the last quarter of 2011 depicted positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, and residential fixed investment that were partially counterbalanced by negative contributions from spending by the federal government, local government, and state (Congressional Budget Office, 3/2011).
Current State of Inflation in the US Economy. Inflation is not likely to be a major predicament in the US economy. Inflation has risen considerably in 2011, but there is a strong likelihood that the trend is improbable to persist. In 2010, the US economy experienced remarkably low inflation, but in the previous 6 months, it experienced an inflation rate of over 2%. There are three elements of foundational inflation that have imbalanced the rate of inflation to be greater than the Federal Reserve Bank’s long-range target. These elements include rent, automobiles, and the prices of apparels (Bureau of Economic Analysis, News Release, 1/27/12).
Current State of Job Creation in the US Economy. The U.S. Bureau of Labor Statistics alleges that, payroll employment in the nonfarm sector rose by approximately 200,000 in December 2011, and the rate of unemployment continued trending down at 8.5%. There have been some job gains in warehousing and transportation, retail trade, health care, mining, and manufacturing. For almost a year, the US economy has consistently experienced higher net new job creation rates than in the initial two years following the global economic recession. However, the current job creation rate is still at 50 of the +26 score found, when the country was technically in a depression (Alex Adrianson, NYT, 9/16/10).
The Existing Budget Situation. The US is currently experiencing deep economic and budgetary challenges. In contrast to the President’s budget estimates, the Congressional Budget Office (CBO) baseline estimates largely mirror the postulation that current taxation and spending laws would remain unaffected. Under that supposition, CBO anticipates that, for the 2012 to 2021 period, there would be a cumulative deficit in the economy totaling to $6.7 trillion. CBO’s estimates depict that, in 2012, the deficit in the President’s budget may decline to a total of $1.2 trillion, or 7.4% of GDP. That deficit is $83 billion larger than the deficit anticipated by CBO for 2012 in its present baseline. The deficits in subsequent years in regard to the President’s proposals may be lesser than the 2012 deficit, even though they may still add considerably to the federal debt. The deficit may to 4.1% of GDP by the year 2015, but enlarge in subsequent years, reaching 4.9% of GDP in the year 2021(Bureau of Economic Analysis, News Release, 21/1/12).
Having come out from the recession, the President proposed a plan to restructure the economy. The 2012 Budget seeks to cut wasteful expenditure, while maintaining the investments requisite for job creation and economic growth. The budget targets limited federal resources, and proposes reforms how the government conducts its business. The fundamental facts in the budget include the following.
The Budget comprise above $1 trillion in reduction of deficit. Approximately 70% from cuts.
Non-security flexible expenditure freeze for five years would decrease the deficit by approximately $400 billion in the coming decade. (Congressional Budget Office, 3/2011).
Appropriate Fiscal Policies for the US Economy. The best fiscal policies for the US economy should address cuts to defense, entitlement, and domestic programs. Every one of the spending cuts would be suitable even if the government would be running deficits. Numerous federal programs diminish individual liberty and lead to economic distortions. In the event that these programs are cut, resources will flow from government related activities of low-return to private sector initiatives of higher-return. This section will illustrate how reductions in spending would eradicate the deficit of the federal budget over 10 years. It explains revenue and spending projections as a share of GDP in accordance with the 2011 Congressional Budget Office projections (Bureau of Economic Analysis, News Release, 1/27/12).The projections in relation to revenues presume the extension of substitute minimum tax reprieve and revoking of the tax increase in the health care law of 2010. The projections for expenditure change the CBO baseline to embrace more pragmatic postulations in regard to troop reduction abroad, and Medicare extension.
In Figure 1 below, the bottom line illustrates that with tax relief, federal revenues are projected to increase to 18.0% of GDP by the year 2021. This is as the economy recuperates and takes up again regular growth. The line at the top illustrates President Obama’s projected spending in regard to his 2012 fiscal budget. Spending, as a component of the GDP, is projected to plunge the coming few years as financial support from the stimulus bill of 2009 dwindles out and expenditure on war plummets, but spending is estimated to begin rising again subsequently. The high spending course would bring about higher debt, higher taxes, or both.
(Bureau of Economic Analysis, News Release, 1/27/12).
The line in the middle of the chart illustrates spending in the balanced budget draft. In this draft, expenditure cuts of above $1 trillion yearly by 2021 will be phased in approximately ten years. The cuts will create substantial savings in interest by 2021, and overall federal expenditure would plunge to 18.0% of GDP. This depicts an equivalent level in comparison to the federal revenues in 2021. With these cuts in place, the federal public debt would climax at 75% of GDP in 2013 and subsequently plunge to 64% of GDP by the year 2021.
The US should increase taxation in order to afford additional public goods, as is the case in Scandinavian countries. The tax revenues in the US are among the lowest, whereas it has one of the highest spending in government. This scenario depicts the budget predicament in the US economy. This anomaly must be corrected.
CONCLUSIONOfficial estimates show that, in the absence of reforms, federal expenditure will rise to above 40% of GDP by the year 2050 and higher subsequently. Local and state spending surpasses that, and consequently, the government would use more than 50% of the whole U.S. economy. Policymakers should institute the set of cuts presented in this paper, and subsequently pursue supplementary reforms including restructuring of Medicare.
Works Cited
Alex Adrianson. “Spending Cuts Are Good For the Economy”, The New York Times, 16 Sept 2010. Web. 31 Jan.2012.
Bureau of Economic Analysis. “News Release”, US Department of Commerce. 27 Jan. 2012. Web. 31 Jan. 2012.
Congressional Budget Office.”Preliminary Analysis of the President’s Budget for 2012”, Congressional Budget Office, March 2011. Web.31 Jan. 2012.
