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Posted on September 9th, 2012, by

The Federal budget of the USA was traditionally oriented on the redistribution of wealth on the national scale. At the same time, it does not necessarily mean that the federal government attempted to establish a total control over the national economy, using its fiscal policies, for instance. In stark contrast, the major goal of the development of the federal budget system was to balance the redistribution of wealth nationwide in order to avoid the social tension provoked by socioeconomic inequality of American people and, what is more, to ensure that all American citizens can exercise their constitutional rights and liberties. In this respect, it is worth mentioning the fact that the US Federal budget has tended to be more and more socially oriented since the 1960s and, today, health care and education constitute a considerable part of federal budget expenditures. At the same time, it is hardly possible to estimate that the development of the US Federal budget and the balance of revenues and expenditures are perfect, because the budget deficit has been a characteristic of the US Federal Budget since 1960 (See Graph 1). In addition, the National Debt grew steadily and, by the present moment, it has reached an unprecedented level (See Graph 2). In such a situation, the necessity of the introduction of changes in the Federal budget system is obvious because it is necessary to optimize the Federal expenditures and revenues in order to decrease the National Debt and the deficit of the Federal budget, because it is future generations of Americans, to put it more precisely, American tax payers, who will pay off the National Debt, which is accumulating progressively.

The US revenues and expenditures in 1960-2007

On analyzing the evolution of revenues and expenditures of the USA in 1960-2007, it is important to underline that some items remained stable, regardless of the changes on the national as well as international level. For instance, the expenditures on the defense were traditionally high in the USA and the expenditure on defense remain the main expenditures item. Similarly, the main sources of revenues to the US Federal budget were income taxes which lay the financial foundation to the budget. At the same time, there were items which evolved consistently in the course of time, such as expenditures on health care, education, or general government as well as business and other revenues. In such a way, the US Federal budget is not a rigid system, instead, it is a dynamic system which constantly evolves.

In order to understand the major directions to which the US Federal budget system is steadily drifting to, it is necessary to dwell upon changes in expenditures and revenues of the Federal budget. In fact, the expenditures of the US Federal budget were traditionally higher than revenues of the Federal budget that led to the almost permanent budget deficit in the USA (See Graph 1). To put it more, precisely, the budget deficit in the US varied more or less significantly, but the US could not overcome the problem of the budget deficit. In fact, within a half of a century, from 1960 to the present days, there was only a short period of time, from the late 1990s to the early 2000s, when there was a surplus in the US Federal budget, which reached it apogee in 2000 and exceeded consistently USD 200 billion ceiling. However, this four year period is absolutely insignificant compared to the rest of the almost fifty years analyzed, which were characterized by a considerable budget deficit.

In actuality, it is possible to trace some clear trends or waves in the deficit of the US Federal budget. Since 1980s the US Federal budget deficit has reached its highest point practically every decade. For instance, the early 1980s, the early 1990s and the early 2000s (after 2001) were marked by a dramatic growth of the Federal budget deficit. At the same time, these periods were marked by a significant stagnation of the national economy. In fact, it is possible to characterize the periods, when the deficit of the US Federal budget hit the ceiling and reached its highest points, as economic crises since the national economy slowed down consistently and the revenues of the US Federal budget dropped respectively to the slowdown of the economic development of the country, while expenditures remained on the same level and they could not always be cut consistently. In terms of the deficit of the US Federal budget, the 1960s were almost perfect, since there were no significant crisis and the deficit remained relatively stable till the mid-1970s.

At the same time, it is important to underline another disturbing trend that, along with the growth of the US Federal budget deficit, the National Debt of the country grew steadily. Moreover, unlike the 1960s and 1970s, when the National Debt was mainly comprised of the public debt, the 1980s, 1990s and especially 2000s are characterized by the dramatic growth of the government-held debt. In other words, since the 1980s the government has taken the responsibility for the National Debt, though, in actuality, it is necessary to understand that it is American tax payers that will eventually pay the government-held debt off. This means that ordinary American tax payers will need to spend more on the pay offs of the National Debt that means the potential increase of taxes and higher fiscal pressure on American tax payers. In addition, some specialists (Tobin, 74) argue that the accumulation of the national debt, especially government-held debt, can lead to a profound economic crisis, especially if the US Federal budget deficit is constantly growing or, at any rate, persists.

In such a situation, it is important to understand the causes of the growing National Debt and the US Federal budget deficit. In this respect, the US Federal budget expenditures can be crucial for understanding of basic causes of the budget deficit and the growth of the National Debt. In actuality, the defense expenditures were the main item which needed a substantial budgetary funding and a considerable part of the Federal budget revenues was directed to cover the defense needs of the USA. In fact, it was only during the 1990s-2000s, when the expenditures of the US Federal budget on defense did not grow. Moreover, in spite of the nominal growth of the defense expenditures, in real terms, the defense expenditures decreased from 1990 to 2000. The reason for such a decline is the end of the Cold War, but the emergence of a new threat, international terrorism, resulted in the enormous growth of the defense expenditures which practically doubled in 2007 compared to 2000 (See tables 1,2,5,7,9,11). At this point, it is important to underline the positive effect of the decline of the defense expenditures on the US Federal budget deficit since it is only by the late 1990s-early 2000s, there was a surplus of the Federal budget.

Therefore, the increase of the defense expenditures, as the main expenditures item, inevitably leads to the growth of the budget deficit.

In addition, it is worth mentioning the growing attention of the US government and policy makers to the social sphere, especially health and education. Since the 1960s the expenditures of the US Federal budget on health care and education grew steadily. But a remarkable trend is that the health care expenditures consistently outpace the education expenditures, though in 1970s, when the growth of the health care expenditures and the education expenditures started, the gap was not as wide as it became in the 1990s and the gap remains wide at the present days (See Tables 1,2,5,7,9,11).

Finally, on analyzing the US Federal budget expenditures, it is important to underline that the General Government expenditures also grew consistently in 1960s-2007, but the decrease of the government expenditures could be observed in the 1990s and the early 2000s. This was a period of the US Federal budget surplus that means that the general government expenditures cuts along with the defense expenditures cuts can be very effective to the reduction of the Federal budget deficit and can lead to the budget surplus.

In such a situation, it is important to maintain the US Federal budget revenues stable. In this regard, the income taxes play a particularly important role because they comprise the basic item of the US Federal budget revenues. Along with social insurance taxes, which have increased substantially since 1960, the income taxes were the major source of revenues to the US Federal budget. At the same time, business and other revenue, which used to be an important revenue item in 1960 has practically disappeared in the later decades (See Tables 2,4,6,8,10, 12).  Thus, the US Federal budget maximized its revenues mainly due to the income taxes and social insurance taxes.

Recommendations

Obviously, the growth of the US Federal budget deficit and the National Debt are very disturbing trends because they threaten to the financial stability in the USA. At the same time, the current situation is probably a perfect time to introduce considerable changes in the US Federal budget system. In actuality, the US economy suffers from an acute crisis which it has probably never suffered since the epoch of the Great Depression. In such a situation, changes and reforms are vitally important to the American economy and the US Federal budget system.

In this respect, it should be said that there are several approaches which can be used to overcome the current crisis and make the US Federal budget system more effective. Traditionally, many specialists (Dow and Hillard, 146) argue that principles of the Keynesian theory can be applied effectively in the contemporary USA because the strengthening of the state monetary regulation can potentially prevent the further deterioration of the situation and facilitate the recovery of the American economy. In fact, Keynesian theory and its later modifications imply the increase of the role of the state and the regulation of the macroeconomic development of the country. In actuality, this means that the US authorities should focus on the maintenance of the stability of the US dollar as the world’s trade currency, the government should focus on the struggle with the growing unemployment rates.’

However, the use of the Keynesian theory and its modifications is a serious challenge to the US economy at large and to the US Federal budget system in particular, because the American economy was traditionally characterized by a high level of liberalism. In fact, the American economy was and still is one of the most liberal economies in the world. In actuality, this means that the interference of the state in the national economy is practically abnormal to the USA. In such a situation, it is necessary to underline that the US Federal budget system is actually the major tool by means of which the government can influence the redistribution of wealth in the USA and, therefore, the government can use this tool to influence or regulate the national economy. It proves beyond a doubt that the US Federal budget system influences the national economy and any changes in this system can have serious outcomes for the American economy.

On analyzing possible ways which can lead to the improvement or optimization of the US Federal budget, it is possible to focus on the reduction of costs and maximization of revenues as the simplest and the only way to decrease the US Federal budget deficit and stop the accumulation of the government-held debt. However, it is necessary to take into consideration possible effects of changes introduced in the US Federal budget system because the reduction of expenditures or increase incomes affects the national economy (Holcombe, 188).

Consequently, the US policy makers should be very careful, while taking a decision on expenditures’ cut and revenues’ increase, which are inevitable in the current situation of a profound economic crisis.

In such a context, it is possible to recommend the reduction of the defense expenditures as the major expenditures item. In fact, it does not mean that the US should stop funding its army and military-oriented industries. Instead, it is necessary to optimize the current defense expenditures on the basis of the existing real threats to the national security of the USA. In actuality, the US defense is a vast defense system which aims at the protection of the US from multiple external threats. In this regard, it is worth revising the defense doctrine of the USA because, at the moment, the US Federal budget can hardly afford the maintenance of a large scale defense system which can protect the US from the threat of the use of the weapon of mass destruction, from the international terrorism, and, at the same time, the US defense system cannot conduct military operations worldwide.

Instead, it is necessary to clearly define priorities for the US defense system and provide the funding of the US defense respectively. To put it more precisely, the threat of the use of the weapon of mass destruction is minimal for the USA, because the Cold War has ended, while the threat from Russia or other powerful country possessing the weapon of mass destruction, such as China is not as significant as it used to be at the epoch of the Cold War. Therefore, the funding of this part of the US defense programs can be limited that will decrease the US defense expenditures consistently. On the other hand, it is possible to focus on the anti-terrorist programs, which, though, should be purely defensive and oriented on the protection of American citizens only. What is meant here is the fact that the US should stop military anti-terrorist operations abroad, especially in Iraq and Afghanistan, which need billions of the US dollars and costs thousands of lives of American soldiers. The withdrawal of American troops from Iraq and Afghanistan can reduce the defense expenditures consistently.

Naturally, it is possible to presuppose that such a decision can negative economic effects for the economic interests of the US because the withdrawal of its troops from Iraq and Afghanistan can lead to the loss of the Gulf region for the US, which plays a strategically important economic role for the US and the entire world as a principal source of oil. In addition, the decrease of the US defense expenditures will lead to the slowdown of economic development because many American companies will lose governmental contracts.

However, both these problems can be solved by means of strengthening national armies of Iraq and Afghanistan. It is possible to export weapon to these countries and recommend local governments increase their armies. Alternatively, it is possible to use the full potential of allies, especially European countries, which can substitute, at least a part of American troops and, therefore, allow the US to reduce its defense expenditures. In such a way, the US industries will get new contracts from Iraqi and Afghani governments that will maintain their stable development, while the US will preserve control over strategic region, along with a considerable reduction of its defense expenditures.

Furthermore, it is possible to recommend reducing general government expenditures. In actuality, the USA suffers from the progress of bureaucracy which has a negative impact on the performance of the state apparatus and makes the use of the US Federal budget funds ineffective. It is worth reminding that a considerable reduction of the general government expenditures in 1990-2000 resulted in the growing surplus of the US Federal budget, while the increase of the general government expenditures contributed to the growing deficit of the US Federal budget. In such a situation, the decision to reduce the general government expenditures seems to be quite logical because it contributes to a consistent improvement of the balance of the US Federal budget.

In this respect, it is important to underline that a reasonable reduction of the general government expenditures can lead not only to the reduction of expenditures, but it can also increase the effectiveness of performance of the government since professionals working in this field can improve the efficiency and productivity of their work in face of a threat of losing the job. At the same time, the current performance of the governmental apparatus is far from perfect and the optimization of its work can contribute to the higher efficiency of the use of funds of the US Federal budget.

In addition, it is possible to reduce social expenditures, such as the health care. In order to maintain the social situation stable it is possible to stimulate private companies to expand their insurance program and develop special programs for people who have low income and are unable to afford a standard insurance. In response, the government can reduce a fiscal pressure on insurance companies.

At the same time, the reduction of costs alone can hardly decrease substantially the US Federal budget deficit because the current economic crisis in the USA leads to a considerable reduction of the budget revenues because people suffer from the decrease of revenues and, therefore, the revenues of the US Federal budget decrease respectively to revenues of American tax payers. In such a situation, it is possible to recommend expanding the basis of taxation, i.e. introduce new taxes for a larger number of people who can afford paying these taxes, while the general fiscal pressure can decrease. In other words, a larger number of Americans will pay taxes, which are lower, compared to taxes the smaller number of Americans pays at the moment.

Conclusion

Thus, taking into account all above mentioned, it is possible to conclude that the US Federal budget system is imperfect. Today, when the economic crisis has struck it is obvious that changes are vitally important for the US Federal budget system. In such a situation, it is possible to recommend the reduction of defense and general government costs along with the introduction of new taxes which are affordable for Americans. As a result, revenues can increase, while expenditures decrease that will lead either to a low budget deficit or even to a budget surplus.

 

 

Works Cited:

Coates, J. The Claims of Common Sense: Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge University Press, 1996.

DeCanio, S.J. Rational expectations and learning from experience, Quarterly Journal of Economics, 1979.

Dow, S. and Hillard, J. (eds.). Keynes, Knowledge and Uncertainty. New York: Routledge,1995.

Holcombe, R. Public Sector Economics: The Role of Government in the American Economy. New York: Allyson and Beacon, 2006.

Friedman, Milton. John Maynard Keynes, Federal Reserve Bank of Richmond Economic Quarterly. Volume 83/2, Spring 1997.

Tobin, James. Liquidity preference as behavior towards risk. The Review of Economic Studies, 25, 1958, 65-86.

 

 

 

 

 

 

 

Appendices:

Table 1

United States Federal
State and Local Government Spending
-5yr -1yr     Fiscal Year 1960     +1yr +5yr

Amounts in $ billion

Change View: people default radical COFOG

Fed

Gov.
Xfer

State

Local

Total

[+] Pensions

11.7

0.0

1.3          

13.0

[+] Health Care

1.7

-2.1

4.7          

4.3

[+] Education

1.6

-1.0

18.7          

19.4

[+] Defense

53.3

0.0

0.0          

53.3

[+] Welfare

3.0

-0.3

8.0          

10.7

[+] Protection

0.2

0.0

2.9          

3.0

[+] Transportation

4.4

-2.9

10.0          

11.5

[+] General Government

0.7

-0.7

5.9          

5.9

[+] Other Spending

9.6

0.0

8.8          

18.4

[+] Interest

7.7

0.0

1.7          

9.3

[+] Balance

3.3

-0.0

-0.9          

2.4

[+] Total Spending

97.3

-7.0

61.0          

151.3

 

Table 2

United States Federal
State and Local Government Revenue
-5yr -1yr     Fiscal Year 1960     +1yr +5yr

Amounts in $ billion

Fed

Gov.
Xfer

State

Local

Total

[+] Income Taxes

62.2

0.0

3.6          

65.9

[+] Social Insurance Taxes

12.2

0.0

4.9          

17.1

[+] Excise and Sales Taxes

9.5

0.0

32.5          

42.0

[+] Fees and Charges

0.0

0.0

7.4          

7.4

[+] Business & Other Revenue

12.8

0.0

4.9          

17.7

[+] Balance

3.1

0.0

-0.0          

3.1

[+] Total Revenue

99.8

0.0

53.3          

153.1

 

Table 3

United States Federal
State and Local Government Spending
-5yr -1yr     Fiscal Year 1970     +1yr +5yr

Amounts in $ billion

Change View: people default radical COFOG

Fed

Gov.
Xfer

State

Local

Total

[+] Pensions

28.4

0.0

3.6          

32.0

[+] Health Care

12.1

-7.6

11.8          

16.4

[+] Education

9.6

-5.8

52.7          

56.5

[+] Defense

94.7

0.0

0.0          

94.7

[+] Welfare

9.1

-0.7

20.5          

28.9

[+] Protection

1.0

0.0

6.5          

7.5

[+] Transportation

7.0

-4.6

16.4          

18.8

[+] General Government

2.3

-3.2

4.7          

3.8

[+] Other Spending

17.1

0.0

8.0          

25.1

[+] Interest

14.4

0.0

4.4          

18.8

[+] Balance

0.0

-0.0

19.4          

19.4

[+] Total Spending

195.6

-21.9

148.1          

321.8

Table 4

United States Federal
State and Local Government Revenue
-5yr -1yr     Fiscal Year 1970     +1yr +5yr

Amounts in $ billion

Fed

Gov.
Xfer

State

Local

Total

[+] Income Taxes

123.2

0.0

14.6          

137.8

[+] Social Insurance Taxes

44.4

0.0

10.7          

55.1

[+] Excise and Sales Taxes

15.7

0.0

62.2          

78.0

[+] Fees and Charges

0.0

0.0

22.1          

22.1

[+] Business & Other Revenue

0.2

0.0

8.6          

8.8

[+] Balance

9.3

0.0

10.0          

19.3

[+] Total Revenue

192.8

0.0

128.2          

321.1

 

Table 5

United States Federal
State and Local Government Spending
-5yr -1yr     Fiscal Year 1980     +1yr +5yr

Amounts in $ billion

Change View: people default radical COFOG

Fed

Gov.
Xfer

State

Local

Total

[+] Pensions

134.4

0.0

14.0          

148.4

[+] Health Care

55.3

-24.9

38.2          

68.6

[+] Education

33.2

-14.4

133.2          

152.0

[+] Defense

167.9

0.0

0.0          

167.9

[+] Welfare

54.9

-2.1

67.4          

120.2

[+] Protection

4.7

0.0

19.2          

23.9

[+] Transportation

21.3

-9.0

33.3          

45.7

[+] General Government

13.0

-25.8

15.4          

2.6

[+] Other Spending

53.8

0.0

25.2          

79.0

[+] Interest

52.5

0.0

14.7          

67.3

[+] Balance

-0.0

-6.8

71.6          

64.7

[+] Total Spending

590.9

-83.0

432.3          

940.2

 

Table 6

United States Federal
State and Local Government Revenue
-5yr -1yr     Fiscal Year 1980     +1yr +5yr

Amounts in $ billion

Fed

Gov.
Xfer

State

Local

Total

[+] Income Taxes

308.7

0.0

55.4          

364.1

[+] Social Insurance Taxes

157.8

0.0

43.7          

201.5

[+] Excise and Sales Taxes

24.3

0.0

168.1          

192.4

[+] Fees and Charges

0.0

0.0

75.8          

75.8

[+] Business & Other Revenue

1.0

0.0

25.5          

26.5

[+] Balance

25.3

0.0

0.0          

25.3

[+] Total Revenue

517.1

0.0

368.5          

885.6

 

Table 7

United States Federal
State and Local Government Spending
-5yr -1yr     Fiscal Year 1990     +1yr +5yr

Amounts in $ billion

Change View: people default radical COFOG

Fed

Gov.
Xfer

State

Local

Total

[+] Pensions

272.2

0.0

38.4          

310.6

[+] Health Care

155.8

-65.9

90.1          

180.1

[+] Education

40.0

-23.2

275.4          

292.2

[+] Defense

342.2

0.0

0.0          

342.2

[+] Welfare

91.5

-9.7

142.5          

224.3

[+] Protection

10.2

0.0

43.8          

53.9

[+] Transportation

29.5

-14.4

61.1          

76.2

[+] General Government

10.5

-23.7

16.2          

3.0

[+] Other Spending

117.0

0.0

55.1          

172.1

[+] Interest

184.3

0.0

49.7          

234.1

[+] Balance

0.0

15.6

200.4          

215.9

[+] Total Spending

1,253.1

-121.2

972.7          

2,104.5

 

Table 8

United States Federal
State and Local Government Revenue
-5yr -1yr     Fiscal Year 1990     +1yr +5yr

Amounts in $ billion

Fed

Gov.
Xfer

State

Local

Total

[+] Income Taxes

560.4

0.0

129.2          

689.6

[+] Social Insurance Taxes

378.7

0.0

124.0          

502.6

[+] Excise and Sales Taxes

35.3

0.0

372.4          

407.8

[+] Fees and Charges

0.0

0.0

211.1          

211.1

[+] Business & Other Revenue

0.1

0.0

58.6          

58.7

[+] Balance

57.6

0.0

0.0          

57.6

[+] Total Revenue

1,032.1

0.0

895.3          

1,927.4

 

Table 9

United States Federal
State and Local Government Spending
-5yr -1yr     Fiscal Year 2000     +1yr +5yr

Amounts in $ billion

Change View: people default radical COFOG

Fed

Gov.
Xfer

State

Local

Total

[+] Pensions

453.9

0.0

76.0

19.7

549.6

[+] Health Care

351.6

-164.2

212.5

69.8

469.8

[+] Education

60.0

-45.9

128.0

390.1

532.2

[+] Defense

358.7

0.0

0.4

0.0

359.0

[+] Welfare

171.4

-21.7

71.1

46.9

267.7

[+] Protection

28.5

0.0

59.8

105.2

193.5

[+] Transportation

46.9

-29.5

68.3

60.8

146.5

[+] General Government

13.0

-27.5

57.4

80.3

123.2

[+] Other Spending

82.3

-3.2

29.2

132.3

240.5

[+] Interest

222.9

0.0

29.2

40.6

292.8

[+] Balance

-0.0

0.0

25.3

40.2

65.5

[+] Total Spending

1,789.2

-291.9

757.0

985.9

3,240.2

 

Table 10

United States Federal
State and Local Government Revenue
-5yr -1yr     Fiscal Year 2000     +1yr +5yr

Amounts in $ billion

Fed

Gov.
Xfer

State

Local

Total

[+] Income Taxes

1,211.8

0.0

227.1

20.6

1,459.5

[+] Social Insurance Taxes

651.2

0.0

50.5

4.4

706.2

[+] Excise and Sales Taxes

68.9

0.0

295.7

296.7

661.3

[+] Fees and Charges

0.0

0.0

86.5

137.0

223.5

[+] Business & Other Revenue

0.1

0.0

147.1

166.0

313.1

[+] Balance

93.5

0.0

0.6

0.1

94.3

[+] Total Revenue

2,025.5

0.0

807.6

624.8

3,457.8

 

Table 11

United States Federal
State and Local Government Spending
-5yr -1yr     Fiscal Year 2007     +1yr +5yr

Amounts in $ billion

Change View: people default radical COFOG

Fed

Gov.
Xfer

State

Local

Total

[+] Pensions

636.1

0.0

137.3

29.9

803.3

[+] Health Care

641.8

-250.6

349.7

116.0

856.9

[+] Education

102.0

-85.0

214.6

565.7

797.2

[+] Defense

653.9

0.0

1.0

0.0

654.9

[+] Welfare

254.2

-35.4

121.4

82.9

423.1

[+] Protection

41.2

0.0

82.9

158.2

282.3

[+] Transportation

72.9

-47.0

99.7

86.8

212.4

[+] General Government

17.5

-42.1

71.5

123.1

170.0

[+] Other Spending

73.4

-6.5

55.9

222.7

345.5

[+] Interest

237.1

0.0

41.6

48.9

327.6

[+] Balance

0.0

0.0

4.6

26.1

30.7

[+] Total Spending

2,730.2

-466.6

1,180.2

1,460.3

4,904.1

 

Key: actual guesstimated

Table 12

United States Federal
State and Local Government Revenue
-5yr -1yr     Fiscal Year 2007     +1yr +5yr

Amounts in $ billion

Fed

Gov.
Xfer

State

Local

Total

[+] Income Taxes

1,533.7

0.0

322.7

31.0

1,887.4

[+] Social Insurance Taxes

867.7

0.0

85.2

5.4

958.2

[+] Excise and Sales Taxes

65.1

0.0

414.0

476.4

955.4

[+] Fees and Charges

0.0

0.0

147.9

208.0

355.9

[+] Business & Other Revenue

0.1

0.0

263.2

225.7

489.0

[+] Balance

101.7

0.0

19.0

9.7

130.5

[+] Total Revenue

2,568.2

0.0

1,252.0

956.2

4,776.4

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