Outlook for the Future

Budget Deficit | Terms to Know and Love | Long Term Effects | Outlook for the Future | Comparisons | Data | Works Cited

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Federal deficits reduce the future standard of lining by lowering national saving which slows the accumulation of national wealth. Increases in government spending (increased government consumption) and federal tax cuts (increased public consumption) increase the federal deficit and reduce national saving. Even if the financial market (i.e. interest rates) is not significantly affected by the shifting of resources from from saving to consumption, decreased national saving can still occur. Although domestic investment is reduced by federal deficits, captial inflows from abroad tend to increase the productivity or both labor and capital.

Effects of Rising Debt on the Economy

• decrease national savings and reduce investment in domestic capital stock and foreign assets
  • decline in the growth of workers' productivity would decline and real wages
    • tapering off of economic growth, leading to a sustained contraction of the economy
  • some portion of the deficit could be financed by foreign investors
    • over time:
      • foreign investors would own larger shares of US output, leaving fewer resources available for domestic consumption
      • financing of the deficit by foreign investors could decline
      • the exchange value of the US dollar could plummet
      • interest rates could soar
      • consumer prices could climb
      • the economy could contract abrubtly
      • stock markets could collapse
      • the economic problems in the US could extend to the rest of the world, weakening the economies of US trading partners

Budgeting Strategies

Future policies are what matter!!!

"Budgetary paths are economically unsustainable not when federal debt hits a critical level but when the government adopts policies that cannot be carried out indefinitely." -CBO, December 2005 (The Long-Term Budget Outlook)

A Policy of Higher Inflation

Positive: Could potentially reduce the real value of government debt.

Negative: Not a viable long-term strategy for managing recurring budget deficits.

Reasoning: The government would be able to repay its debt in “cheaper dollars.” This would initially make borrowing better off at the expense of creditors, but financial markets would eventually demand higher interest rates. This situation would in time lead to hyperinflation if the government continued to print new money in order to finance the deficit.

Using inflation to finance the deficit cannot address the fundamental problem: that spending exceeds revenues.

A Policy of Faster Economic Growth

Positive: Would push up revenues in the short-run.

Negative: Raise spending in the long-run.

Reasoning: For example, Social Security benefits depend on individual workers’ wage histories. Therefore, an increase in the current real wage would lead to higher benefits being paid to workers in the long-run.

In high-debt scenarios, faster economic growth can only provide temporary relief.