The USA is governed by a two tier government. The federal government is the overall government which controls most of the activities with cross-sectional application in all the states. The state governments on the other hand control single state and also have significant fiscal roles. Issues such as national security are handled by the federal government while education and many other social services are handled by the state governments.
This being the case, the two governments require revenues to be used in public expenditure. This paper discusses the federal government’s fiscal policies. It looks at the sources of revenues as well as the major expenditure programs undertaken by the federal government. It also looks at the federal government’s budget deficit, its implications to the government and some ways of dealing with the deficit.
The federal government has a much greater responsibility over the citizens hence its revenues account for a larger percentage of the revenues in the country. There are several sources of revenues for the federal government which when combined account for an average of 18% of the entire GDP. The largest contributor of revenues for the federal government taxes on individual incomes. This category accounts for about 43% of the entire revenues. The second category of revenues is the Social Security taxes. This tax category accounts for about 42% for the year 2009. Finally, corporate taxes account for 7% of the total revenues.
The rest government revenues are raised through other minor taxes such as gift tax, estate tax and excise duties. The entire sum of the federal tax revenues accounts for an average of 18% of the country’s GDP. As can be seen, the federal tax revenues heavily fall on the individual. The reasoning is that taxing individuals expands the government’s tax base as opposed to targeting businesses. This means that the government can obtain much higher revenue while minimizing the effect on the incomes of the citizenry. Social security taxes are high due to the immense responsibility the federal government takes in ensuring social security for the citizenry (Williams, 2009, par3).
For the year 2009, the government incurred an expenditure of about 3.52 trillion which was about 18% higher than the expenditure in 2008. This was mostly occasioned by the continued implementation of the economic stimulus package which was instituted in response to the economic crisis. The most important categories of expenditure for the federal government are social security, defense and inland security as well as Medicare and Medicaid. Notably, the entire expenditure items are categorized in to two namely: Mandatory and Discretionary expenditure. Defense and inland security takes the lion share of the expenditure.
It comprises of the total funding requirements for the security forces at home and abroad as well as the different internal security agents and other security related matters. This is in consideration of the fact that maintaining national integrity is the most important responsibility wholly borne by the federal government. This category of spending accounts for about 23% of the federal government expenditure. For the year 2009, the figure stood at $762 billion.
Following closely is expenditure for social security which accounts for about 20% of the expenditure. Finally, Medicare and Medicaid account for about 19% of the expenditure. Defense is a discretionary expenditure while Medicare and Medicaid are mandatory. Other elements of expenditure account for the rest of the proportion. Discretion ones taking 12% while mandatory accounts for 17% (Percentage breakdown of the government’s tax revenue stream, 2008, par2-6).
Following the economic recession which sparked off in 2007, the federal government has been forced to apply expansionary fiscal policies in a bid t jump start the economy. This has come in the form of the stimulus package which targets different sectors either by creating demand or by boosting availability of capital. A significant proportion of this money was raised by borrowing mainly in the international markets. The implication of this is a significant growth of an already high national debt. At the moment, the debt has soared to a mind boggling 11.4 trillion dollars and continues to rise (Felsenthal, 2010, par3).
The rise in debt is a matter of concern for the American Citizens. True, the debts are useful in the short term as they enable a country develop production capacities and pay for them in the later years. However, the long-term implication of a huge debt can be disastrous for the economy and the future citizens. First, it can be noted that the interest outlays currently account for about 5% of the federal government expenditure. This is a cost of the borrowed money.
Such huge amounts would have been used internally to build capacities. Continuing on this trend means great losses for the country. Secondly, the fact that the debts have to be paid in the future puts justifiable doubts on the ability of the federal government to cut taxes. In fact in most cases, it leads to a higher tax regime in the future. Such circumstances can be counterproductive. The good intentions of raising the money to facilitate economic recovery could be countered by a mandatory rise in taxes in a bid to ensure that repayments on the debts do not fall behind schedule. A rise in taxes is a blow to businesses hence output (National Debt Clocks and Savings Clocks, 2009, par5).
In addition, analysts argue that a growing national debt pushes for the interest rates to remain low. This is due to the need to encourage flow of funds which supports economic activities hence increasing revenues to be used to repay the loans. The inability of the federal government to vary interest rates upwards can prove dangerous in the future. This is because consistently low interest rates would trigger inflation in the economy as well as other related macroeconomic instabilities. With such instabilities it gets very difficult for the country to achieve long-term consistent economic growth as desired. These effects put great doubts to the economic prospects of the US.
These concerns can be minimized by taking some steps in reducing the magnitude of national debt in the short run. The fed could sell some assets acquired in a bid to reduce the debts. More importantly, the government should strike critical balance between the need for stimulating the economy today and the prospects of the entire economy. It would be an act of selfishness to use all means possible to pull the economy out of the recession but leave behind a trail of debts to be repaid by the future generations.
It is however notable that such balance is hard to establish mainly due to political implications. Political leaders know that the people wish to get out of the recession and hence are bound to use such opportunities to enhance popularity. This is the main hindrance.
Felsenthal, M. (2010). U.S. government debt seen pressuring Fed. Web.
National Debt Clocks and Savings Clocks. (2009). Zfacts. Web.
Percentage breakdown of the government’s tax revenue stream. (2008). Factcheck. Web.
Williams, R. (2009). The Numbers: What are the federal government’s sources of revenue? Web.