U.S.

Fiscal Policy

Content
Fiscal Deficit U.S. Fiscal Deficit Causes of Fiscal Deficit Ramification Conclusion

Fiscal Deficit
Fiscal Deficit is nothing but the difference between the money spent by the Government and the total income earned. Fiscal deficit is not necessarily a bad for the economy. However, large and persistent fiscal deficit can be an indication 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 the chances of inflation in the economy . So high inflation and a large fiscal deficit lead to a weaker national currency (imports become expensive) and reduce the 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 to be at 4.5 % GDP.
Year
2000 2001 2002 2003 2004 Estimated

Surplus/Deficit ($ Bn)
236 $ Bn 127 $ Bn -157 $ Bn -375 $ Bn -520 $ Bn
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U.S. Fiscal Deficit contd.

There are many causes of US Fiscal deficit that turns surplus 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 war against terrorism. War against Afghanistan and Iraq, involved huge spending on its Military Forces. US Budget Expenditure on defense hovered around 16.5% from 1997 to 2001. Expenditure increased to 17.3% in 2002 and 18.8% in 2003 leading to outlay of $56 billion. Expenditure was expected to increase by 12% over the existing amounting to $49 billion

Causes of US Fiscal Deficit contd.

Defense Spending was expected to fall after 2005,in 2006 and 2007 marginally. Evident to prove that wars had a major dent on US economy.

Causes of US Fiscal Deficit contd.

US Government spent huge sum on the post war humanitarian activities. Expenditure on international development and humanitarian assistance leading to $7 billion in 2002. Expenditure increased to $10 billion in 2003 and exponentially rose to $17 billion in 2004 projected to increase to $21 billion in 2005. Estimates of rebuilding Iraq ranged from $50 billion to $100 billion US lawmakers provided more than $18 billion in grants to assist in reconstruction.

Causes of US Fiscal Deficit contd.

Economic slowdown US GDP was negative for first 3 quarters of 2001 George Bush sought large scale tax cuts to avoid recession & 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

Causes of US Fiscal Deficit contd.

Economic slowdown (contd.) Grow economy & avoid recession by creating jobs, boost savings, encourage investment in factories & equipment by 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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Causes of US Fiscal Deficit contd.

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
% change Corporate Profits 2000 0% 2001 -10% 2002 7% 2003 -3%

Corporate Taxes

12%

-27%

-2%

-10%

- Falling Corporate Dividends

Major industries affected : - Manufacturing Sector - Transportation sector

Causes of US fiscal Deficit contd.

Falling Excise Duty collection - Lower production
% change Excise Tax 2000 2001 2002 2003 -2% -4% 1% 1%

Causes of US fiscal Deficit contd.

Increase in Expenditure on Subsidies
% change 1999 2000 2001 2002

Expenditure on Subsidies

9%

9%

25%

-30%

Increase in Expenditure on Social Welfare

% change 1999 2000 2001 2002

Expenditure on Social Welfare

3%

5%

10%

9%

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 social secutiy 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 2003 as 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 asking for making all the tax cut to be permanent. In his State of Union address 2004, Bush said, What the Congress 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 trillion through 2014. If added interest payment would have been included to national debt, then this figure rises to $2.0 trillion. Now we will see whether this decision is right or wrong

 Tax revenues, generally pay for programs like health care, education and national security. So in order to finance this loss in tax revenue, we have two choices: 1) cut social spending or 2) increase the national debt. A permanent tax cut must be paid for either current and future tax increases current and future spending cuts increased borrowing. Borrowing postpones, but does not eliminate, the need to raise taxes or cut spending.

 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 cause reductions in growth. Extending the tax cuts will not reduce uncertainty. Instead, it would increase the long-term imbalance between spending and revenues and make even larger policy changes required.

Thank You

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