US Fiscal Poilcy

7/29/2019 US Fiscal Poilcy

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U.S. Fiscal Policy


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Content

Fiscal Deficit

U.S. Fiscal Deficit

Causes of Fiscal Deficit

Ramification Conclusion

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Fiscal Deficit

Fiscal Deficit is nothing but the difference between themoney spent by the Government and the total incomeearned.

Fiscal deficit is not necessarily a bad for the economy.However, large and persistent fiscal deficit can be anindication of several worrying signs in the economy. It

could mean :Government is spending money on unproductive

program tax collection is not effective

In any case, a large fiscal deficit significantly increases thechances of inflation in the economy .

So high inflation and a large fiscal deficit lead to a weakernational currency (imports become expensive) and reducethe creditworthiness of the country

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U.S. Fiscal Deficit

U.S. had a budget surplus of $ 236 Bn in the year 2000 .This has been deteriorated in next 3 years.

The projected deficit for the year 2004 was estimated tobe at 4.5 % GDP.

Year Surplus/Deficit ($ Bn)

2000 236 $ Bn

2001 127 $ Bn

2002 -157 $ Bn

2003 -375 $ Bn

2004 Estimated -520 $ Bn

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U.S. Fiscal Deficit contd.

There are many causes of US Fiscal deficit that turnssurplus into deficit like

Spending by US on war against terrorism

Spending on Post war humanitarian activities

Economic slow down

Unemployment etc ..

Ramification causes by large fiscal deficit. We will discuss about the effects of permanent tax cuts

on fiscal deficit

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Causes of US Fiscal Deficit

The US government had been spending a lot on its waragainst terrorism.

War against Afghanistan and Iraq, involved hugespending on its Military Forces.

US Budget Expenditure on defense hovered around16.5% from 1997 to 2001.

Expenditure increased to 17.3% in 2002 and 18.8% in2003 leading to outlay of $56 billion.

Expenditure was expected to increase by 12% over theexisting amounting to $49 billion


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Causes of US Fiscal Deficit contd.

Defense Spending was expected to fall after 2005,in2006 and 2007 marginally.

Evident to prove that wars had a major dent on USeconomy.


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US Government spent huge sum on the post warhumanitarian activities.

Expenditure on international development andhumanitarian assistance leading to $7 billion in 2002.

Expenditure increased to $10 billion in 2003 andexponentially rose to $17 billion in 2004 projected toincrease to $21 billion in 2005.

Estimates of rebuilding Iraq ranged from $50 billion to$100 billion

US lawmakers provided more than $18 billion in grantsto assist in reconstruction.


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Economic slowdown US GDP was negative for first 3 quarters of 2001

George Bush sought large scale tax cuts to avoidrecession & cut taxes from 2001 to 2003

Tax cuts for families on borderline of poverty Individual income taxes fell from 10.3% in 2000 to 7.3%

as % of GDP in 2003

Tax cuts made savings more attractive, people have

more money to spend

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Economic slowdown (contd.) Grow economy & avoid recession by creating jobs, boost

savings, encourage investment in factories & equipmentby speeding up tax relief

US : An Investor society, 50% of population is investors Turns on investment, helps capital formation and thus

foster job creation.

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Unemployment Per the BEA, the US unemployment rate increased from

4% in 2000 to 6% in 2003.

Reasons: Economic slowdown, large scale outsourcing

of mfg. and ancillary services Consequences: Increase in unemployment

compensation from $23Bn in 2000 to $53Bn in 2002.

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Causes of US fiscal Deficit contd.

Falling Corporate Profits

- Falling Corporate Dividends

Major industries affected :

- Manufacturing Sector

- Transportation sector

% change 2000 2001 2002 2003

Corporate Profits 0% -10% 7% -3%

Corporate Taxes 12% -27% -2% -10%


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Falling Excise Duty collection

- Lower production

% change 2000 2001 2002 2003Excise Tax -2% -4% 1% 1%


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Increase in Expenditure on Subsidies

Increase in Expenditure on Social Welfare

% change 1999 2000 2001 2002

Expenditure on Subsidies 9% 9% 25% -30%

% change 1999 2000 2001 2002

Expenditure on Social

Welfare 3% 5% 10% 9%


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Ramifications

Ramification is caused by large fiscal deficit

upward pressure on Interest rate

crowding out

An erosion of longer term US productivity growth.

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The baby boom generation & pressure on the socialsecutiy and medicare systems expenses

Increase in annual debt rate at 7% between 1991-1997

Increase in the public debt stood at $3.9 trillion in 2003as against $711 billion in 1980.

Public debt increased to 36.1% in 2003.

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Conclusion

US Government was confident of controlling deficit but askingfor making all the tax cut to be permanent.

In his State of Union address 2004, Bush said, What theCongress has given, the Congress should not take away.

For Job growth, the tax cut should be permanent. It has been estimated that Making the 2001, 2002, and 2003

tax cuts permanent would reduce revenues by $1.7 trillionthrough 2014.

If added interest payment would have been included to nationadebt, then this figure rises to $2.0 trillion.

Now we will see whether this decision is right or wrong


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Tax revenues, generally pay for programs like healthcare, education and national security.

So in order to finance this loss in tax revenue, we havetwo choices:

1) cut social spending or

2) increase the national debt.

A permanent tax cut must be paid for either

current and future tax increasescurrent and future spending cuts

increased borrowing.

Borrowing postpones, but does not eliminate, the need

to raise taxes or cut spending.


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If the tax cut is debt-financed for the foreseeable future- reduce the long term size of the economy- would be regressive- would hurt future generations by reducing output

and increasing public debt. If the tax cut is financed entirely by reductions in

spending programs like better health, more education,improved infrastructure, etc. would likely causereductions in growth.

Extending the tax cuts will not reduce uncertainty.Instead, it would increase the long-term imbalancebetween spending and revenues and make even largerpolicy changes required.


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Thank You

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US Fiscal Poilcy