US Budget Deficit

By: EconomyWatch   Date: 30 June 2010

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US Budget Deficit has increased in the past three years. A deficit in the national economy occurs when the government spends more than what it earns as revenue. According to an economist removing the US deficit is the most important responsibility of the present US government. When the government runs into continuous deficit it accumulates into a national debt. At the moment US has a national debt of $5.04 trillion.

US deficit was reduced during the period from 1998-2001 which was the post Iraq War period. But now unfortunately US deficit has again skyrocketed. This year it has been calculated that the US deficit has amounted to 3.5% of the GDP and would continue to rise in the following years by a much larger percentage. The fiscal policy of the US government has contributed a lot towards increasing the deficit. According to the forecast the US deficit is likely to reach as high as 7% over the next few years.

Causes of the Deficit
The US government ran into deficit because of their flawed fiscal policy and because of the piling up of the health and retirement cost for the boom in the baby generation.
Effects of the Deficit
The US deficit would lead to damage in the US economy. It would harm the prospect of the Americans in future. It would affect the income of the American natives. But the worst possible effect would be that it might trigger a financial crisis which could be sustained for a long period. In that case it may cause a great damage to the US economy.
Highest US Deficit
The US government ran into its highest deficit during the year 2004 when its total expenditure was more than the total revenue. In 2004 the amount of revenue for the US government was $1862billion and the expenditure was $2338billion. Therefore the country experienced a heavy deficit of $476 billion which is 25.56% and 4.07% of the GDP.
US Policy to Cover up the Deficit
Whenever the US government runs into a deficit it declares new debt to make up for the deficit. The US government floats bonds in the open market which could be bought by anybody. The money that is accumulated from here is translated into cheques which the Federal Reserve handles. This money turns into an asset. This process expands the monetary supply which eventually causes an inflation culminating into a deflationary bust. Therefore, the value of US money is restored completing the cycle. In this way US government has been able to decrease the budget deficit currently. It clears off its debt by paying from the surplus generated by the US bonds.


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