In the wake of a turbulent global economy, public budgeting and finance have become one of the most significant challenges for most financial administrators. As a financial administrator, one is required to prepare budgets and prepare information regarding the financial information and deducing the repercussions for organizational and national funding needs and performance. Nonetheless, three are very many pressing issues within public finance and budgeting that affect financial administrators not only in the short term but also in the future. In the USA, debt financing has elicited some political and public storm over the years. It is on not only financial administrators but also the entire nation’s economy will feel its impact. This essay aims at focusing on the impact of debt financing in the USA.
The politicians and economist in the USA have begun paying close attention to various issues following an increased global financial meltdown. However, how the nation’s debt level has risen over the years has remained obscure as supporters and opponents of debt financing each support why their arguments are the best. Similarly, a considerable number of people in the USA have no awareness of how the national debt might affect their lives, and this brings about a centrepiece for confusing discussions. The federal deficit results from the government spending more than it earns. The treasury is forced to seek alternative means of meeting the government’s expenditure, and this leads to borrowing. The national debt comprises of all the money that the government owes to its creditors. As of 2019, the national debt had reached an estimated $22.22 trillion (Thornton, 2012). The USA national debt has surpassed its GDP by over 100% as of 2012 as compared to 24% in the 1970s (Thornton, 2012). The anemic economic recovery, prolonged and relatively deep recession and the effects of the global financial crisis bring about this increased national debt.
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Therefore, this research will focus on debt financing effects in the USA. This will be categorized based on financial, social and political implications. The research will highlight the negative and positive effects that debt financing has had on the USA over the years. Also, it will highlight what the future for debt financing in the USA is and highlight recommendation that can be used by the government in reducing debt financing.
Past, Present and Future Patterns of US Public Debt
Article 1 Section 8 gives the National Congress the power to borrow money on behalf of the nation and Congress has used this right since the constitution was drafted in 1791. The only time the USA Congress did not borrow debt was in 1836. Debt financing has been one of the most politically polarizing topics in the USA with regards to its reduction and government policies. The critics of all debt reduction strategies always point fingers to other issues as they claim the debt has never risen since the 1960s and even cite that it has tremendously reduced (Thornton, 2016). However, the bottom line is that the national debt has continued to grow over the years. The USA national debt has exceeded $16 trillion (Council on Foreign Relations, 2019). The main driver for this has been the increased tax reforms and increased spending by the Trump administration.
The national debt is expected to continue growing over the next decade. The major legislation signed into law by President Trump will see the national debt doubling by 2029, and this will put the debt close to the entire USA economy’s size (Council on Foreign Relations, 2019). In 1974, the national debt to the GDP was at 24% (Thornton, 2012). Debt financing in the USA has begun to balloon as from the 1980s due to increased defence spending and increased tax cuts. President George W Bush increased budget deficits through the Afghanistan and Iraq wars. The Medicare introduced by President Obama increased debt financing by $1 trillion. An increased financial crisis during the Great Recession saw the introduction of bailout programs that injected billions of dollars into the economy as fiscal stimulus. By 2019, the debt had hit $22 trillion and pushing it to more than 120% of the GDP (Council on Foreign Relations, 2012). Over the next ten years, the tax cuts introduced by President Trump when he signed the Tax Cuts and Jobs Act is projected to add another $1.85 trillion to the debt over the next decade (Council on Foreign Relations, 2019). It is an indication that debt financing is going to be the primary means the USA government finances its budget deficit for an unknown time.
Implications of Debt Financing
Financial Implications
According to Keynesian macroeconomists, debt financing is beneficial to a nation as it boosts the economy’s aggregate demand (Blinder, 2008). According to Keynes, the increased borrowing by the government laid down a foundation for increased investments. This arises from the fact that the government can utilize and absorb the current savings, which in turn averts higher unemployment rates. Increased investment in nations will allow people to have an income and thus increasing consumption rates. However, Keynes also argued that the best time for the government to borrow was during a recession as at this time, most people engage in savings (Aspromourgos, 2018). The unused savings would be used in fueling economic growth. This was referred to by Keynes as an expansionary fiscal policy. Similarly, during a recession, there is a high rate of unemployment and falling real output.
Nonetheless, government borrowing can also bring about negative financial implications such as manipulation of interest rates and inflation. Additionally, this can suppress exports and hurt the capital structure and private investment. The nation will be forced to seek for means through which it can service and repay the loan. The primary source of government revenue is taxes, and this means that it will increase the taxes. An increased tax rate will also affect various financial institutions that offer credit to citizens, and thus they are bound to increase the interest rates (Al-Majali, 2018). This makes borrowing expensive. The increased interest rates will bring about an increase in treasury securities rate, and this makes corporate operations in the USA to seem riskier. The newly issued bonds will witness and increased yield. Companies will be forced to raise the prices of goods and services to meet the debt service obligation costs. In the end, thus brings about inflation as people pay more for goods and services.
Social Implications
As the national debt continues to increase, the government is forced to cut spending on various programs such as agriculture, social security services, health and education (Thornton, 2012). These cuts will affect the living conditions of the USA citizens. The results of such policies will be an increased rate of poverty and the accumulation of wealth only to few people in the nation. An increase in poverty is bound to affect access to health and education. When people have no other means to get incomes, they will turn to crime and this can increase the crime rate in country endangering the lives of other people. Job insecurity will bring about a higher rate of unemployment, and a high number of children will begin to drop out of school to assist their parents in supporting the families. Nonetheless, according to Keynesian economists, debt financing is bound to improve investment opportunities in a nation (Aspromourgos, 2018). An increased investment brings about more job opportunities for citizens. The people can have a source of income, which they can use to improve their lives and better those of their children.
Political Implications
Following increased debt financing in the USA, Standard and Poor reduced the USA long-term sovereign credit rating from AAA to AA+ in 2011 (Johnson, 2011). The reduction of the rating arose from the increased political heat from the Republicans and the Democrats. The S&P believed that the institutions had become ineffective in managing the debt crisis. In 2011, the USA government was close to defaulting its public debt, and this would have brought about adverse outcomes (Johnson, 2011). Similarly, the policymakers tend to engage in various measures to limit debt financing and payment of already accumulated debts. The policymakers can increase the taxes without consulting the pu8blic, and this has negative consequences to the entire economy. The increased partisan debates related to debt financing can thus affect the entire nation. On the other hand, the positive outcomes of best financing for policymakers are that they are forced to set in place policies that will improve the economy and reduce the overreliance of the country to debt financing. The channeling of funds to sectors that can fuel growth will create employment opportunities to such sectors, and this improves the lives of the people.
Conclusion
The prognosis for the Future
The USA debt is bound to continue increasing in the new future. With implementation of the Tax Cuts and Job Acts legislation, that has reduced the tax collection form individuals and companies, the country will be forced to continue engaging in debt financing. The nation is still engaging in war against terror as witnessed in Syria and other Middle East nations. This will continue to balloon government expenditure (Edwards, 2011). Implementation of programs such as Medicare/Medicaid and health a population increases will also balloon the government deficit. As more people continue to retire, the socials security program and disability pensions are expected to raise over $1 trillion in the near future.
Future Research Suggestions
The deficit that the government has in its budgets is what led to an increased rate of borrowing. When the taxes are enough to cover for the government's expenses, the debt is bound to become lower, and a reduced tax brings about a higher debt financing need. The increased national debt in the USA over the two and half decades has been an increased reduction of taxes, which have been referred to as “Bush tax cuts”. Nonetheless, despite the increasing need for debt financing, respective governments, President Obama and President Trump have continued to engage in tax cuts by implementing tax reduction legislation. This is an indication that there is a need to research on the relationship between the tax cuts and debt financing. This arises from the fact that the policymakers do not seem to see a link between the increased taxes cut legislations and national debt financing.
Recommendations
It is high time the USA government rethink about the continued tax cut reforms legislation. During the George Bush administration, tax cuts lead to increased debt financing. The Tax Cuts and Jobs Act of 2017 signed by President Trump that reduced individual and corporate taxes have heightened the need for debt financing by the government (Henry, Plesko, & Utke, 2018). However, it is high time the government sets up legislation that does not necessarily cut on taxes.
Similarly, the USA government has spent trillions of dollar on wars in Afghanistan, Pakistan, Syria and Iraq. This has continued to balloon the national defense budget since 2001. The national debt has risen since the involvement in the war against terror (Johnson, 2011). It is high time the government rethinks about the war strategies and focus on other important issues such as improving the economy and protecting the nation from terrorism from within its boundaries.
References
Al-Majali, A. A. (2018). Crowding Out Effect of Public Borrowing: The Case of Jordan. International Review of Management and Marketing , 8 (1), 119-125.
Aspromourgos, T. (2018). Keynes, Public Debt, and the Complex of Interest Rates. Journal of the History of Economic Thought , 40 (4), 493-512.
Blinder, A. S. (2008). Keynesian economics. The Concise Encyclopedia of Economics , 2 (008).
Council on Foreign Relations. (2019). The national debt dilemma . Retrieved on 23 October 2019, from https://www.cfr.org/backgrounder/national-debt-dilemma
Edwards, R. D. (2011). Post-9/11 War Spending, Debt, and the Macro economy. Watson Institute for International Studies, Brown University . Retrieved on 23 October 2019, from https://watson.brown.edu/costsofwar/files/cow/imce/papers/2011/Post-9%3A11%20War%20Spending%2C%20Debt%2C%20and%20the%20Macroeconomy.pdf
Henry, E., Plesko, G. A., & Utke, S. (2018). Tax Policy and Organizational Form: Assessing the Effects of the Tax Cuts and Jobs Act of 2017. National Tax Journal , 71 (4), 635-659.
Johnson, C. L. (2011). The Downgrading of the United States of America: Does it certify the Fiscal Decline of America? SPEA Insights . Retrieved on 23 October 2019, from https://oneill.indiana.edu/doc/research/johnson_downgrading_us_certify_fiscal_decline.pdf
Thornton, D. L. (2012). The US deficit/debt problem: a longer-run perspective. Federal Reserve Bank of St. Louis Review , 94 (6), 441-55.
