Introduction
A reduction in demand for products and services tends to have a direct impact on the economic activities, as this would mean that companies would engage in far much fewer activities taking into consideration the reduced demands. That creates the need for the government to come up with a structured mechanism that would be directed towards encouraging aggregate demand to increase as part of the economic environment. The use of expansionary fiscal policy is seen as one of the key recommendations for the government is seeking to ensure that it creates that underlying platform through which to ensure that consumers can spend more. The expectation is that this will help push the demand for products and services higher; thus, allowing for the stimulation of the economy in a significant way.
The adoption of the expansionary fiscal policy is expected to have a direct impact on reducing the federal debt considering that the government will find itself in a much better position to fund its spending through the taxes collected (Dar & Amirkhalkhali, 2017). The fiscal policy will have a direct impact on reducing burden, which would mean that corporate companies will experience higher profit margins. The effect that this is expected to have is that it will see higher investments by the corporate entities back into the economy, which will have a stimulating effect. Ultimately, the government would find itself earning much more from the stimulated economy; thus, reducing the demand for borrowing as one of the ways through which to ensure that it can meet its federal projections. It is from this perspective that this report seeks to examine the use of fiscal policy as one of the key recommendations aimed at dealing with the issue of the federal debt.
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Federal Debt Implications on the Economy
An increase in the national debt is expected to have a direct implication on the economy, which creates the need for having to find ways through which to reduce government borrowing. Firstly, an increase in federal debt acts as one of the contributing factors leading to a rise in interests, which the government is expected to pay for the funds borrowed. Elmendorf & Sheiner (2017) indicate that increased government borrowing would mean that the government may be spending significantly on interests, which are funds that would have been directed towards other programs. The implication is that most of the investors would opt to engage in business with the government other than having to focus on promoting private sector investments. That would reduce crowding out where private sector funding would reduce significantly due to the increase in government borrowing.
Secondly, an increase in the federal debt means that economic opportunities would reduce, which would mean that the financial disparities would also increase. By increasing the national debt, the government creates a situation where the country faces budgetary imbalances that are likely to harm the American people. The inequalities can be seen from the fact that the government tends to over project its growth capacities, thereby impacting the position of the small scale investors. Lastly, an increase in the federal debt would mean that the government's flexibility in terms of ability to deal with a crisis reduces, considering that it finds itself with a huge budget gap. Consequently, this means that in the event of a financial crisis in the country, the government may not be in any position to offer any reliable options, which will be brought out by its inability to cover the expected financial expectations.
Policy Recommendation
While considering that indeed, exposure to a higher federal debt is likely to have a wide array of negative implications on the economy, it would be necessary for the government to focus on fiscal policy as its main recommendation to dealing with the debt issue. The shift towards the budgetary policy would mean that the government would be in a much better position of having to encourage economic growth (Haltom & Weinberg, 2015). Additionally, the fiscal policy would also mean that the government would help to increase the aggregate demand for products and services within the economic positioning of the country. That will encourage more investments from the private sector; thus, ensuring that other aspects of the economy improve including reduced unemployment.
Fiscal Policy and Federal Debt
One of the ways that the government would be able to reduce federal debt is by focusing on the monetary policy, which is expected to result in an increase in collections by the government through taxes. However, it is equally important to take note of the fact that focusing on the fiscal policy would seek to encourage more spending among consumers taking into account that the government would be in a position to adopt measures such as cutting down on taxes. From a corporate perspective, corporate companies will experience higher profits due to the measures that the government may have put in place as part of its fiscal policy (Traum & Yang, 2015). That would mean that these companies would invest more in the economy; thus, increasing the government's collections from the economy.
Fiscal Policy to Reduce Tax
The government may focus on the use of the fiscal policy to help in reducing taxation as one of the ways through which to stimulate economic growth. By lowering taxes, the government seeks to ensure that households have a much higher disposable income that would help increase their spending. Higher spending would mean that the gross domestic product (GDP) would equally increase; thus, encouraging more investment from local and international investors (Salma & Said, 2016). Before investing, investors often seek to consider the viability of the economy, as this defines their confidence. The use of the fiscal policy to reduce taxes would mean that the government can exude economic confidence to help in attracting more investment. The idea is having to ensure that the economy is stable, as this would serve as a guarantee for the best possible outcomes in terms of government collections.
Fiscal Policy to Increase Aggregate Demand
One of the critical aspects that the government may need to consider in its approach towards dealing with the federal debt is the aggregate demand for products and services. The adoption of a favorable fiscal policy is expected to have a direct impact on increasing aggregate demand taking into consideration that it becomes much easier for the government to encourage people towards spending on different products and services (Whalen & Reichling, 2015). On the other hand, this can also be achieved by having to encourage more investment into the economy as a way of increasing competition; thus, lowering the price margins for different products and services offered to the consumers. The expectation is that this would encourage them to spend more on a wide array of products and services provided in the economy. By increasing aggregate demand, the government can increase its tax revenues, which would mean that its demand for borrowing would reduce significantly (Bhandari, Evans, Golosov, & Sargent, 2016).
Long-Term Implications on Economy
When adopting the fiscal policy, one of the key aspects to note is that the government does not only need to consider how it affects the federal debt but may need to go beyond to establish how the policy would change the structure of performance with regard to the economy (Cassou, Shadmani, & Vázquez, 2017). That would be an essential aspect of consideration towards highlighting the advantage of having to adopt this fiscal policy as a recommendation for dealing with the national debt issue. The long-term implication of taking a fiscal policy is that it will help towards projecting the economy as being favorable when compared to others. That would mean the economy is much more likely to find itself in a position where its growth rate is much higher than may be expected attributed to the fact that the economy encourages investments from both local and foreign investors. The expectation is that investors will be cushioned from possible market losses based on the fiscal policy adopted.
Conclusion
An increase in the federal debt is expected to have a direct implication on the economy, which creates the need for having to find ways through which to reduce government borrowing. It would be necessary for the government to focus on fiscal policy as its main recommendation to dealing with the debt issue to encourage more spending among consumers taking into account that the government would be in a position to adopt measures such as cutting down on taxes. The government may focus on the use of the fiscal policy to help in reducing taxation as one of the ways through which to stimulate economic growth. The government may need to focus more on increasing aggregate demand for products and services through its fiscal policy as a strategic approach through which to ensure that it can deal with the national debt issue.
References
Bhandari, A., Evans, D., Golosov, M., & Sargent, T. J. (2016). Fiscal policy and debt management with incomplete markets. The Quarterly Journal of Economics , 132 (2), 617-663.
Cassou, S. P., Shadmani, H., & Vázquez, J. (2017). Fiscal policy asymmetries and the sustainability of US government debt revisited. Empirical economics , 53 (3), 1193-1215.
Dar, A., & Amirkhalkhali, S. (2017). Fiscal Policy, Total Factor Productivity, and Economic Growth in Advanced Economies. Applied Econometrics and International Development , 17 (2), 5-18.
Elmendorf, D. W., & Sheiner, L. M. (2017). A federal budget policy with an aging population and persistently low-interest rates. Journal of Economic Perspectives , 31 (3), 175-94.
Haltom, R., & Weinberg, J. A. (2015). Unsustainable fiscal policy: implications for monetary policy. Economic Quarterly , (2Q), 151-167.
Salma, S., & Said, T. (2016). Threshold effects of fiscal policy on economic growth in developing countries. Journal of Economic & Financial Studies , 4 (03), 24-37.
Traum, N., & Yang, S. C. S. (2015). When does government debt crowd out investment? Journal of Applied Econometrics , 30 (1), 24-45.
Whalen, C. J., & Reichling, F. (2015). The fiscal multiplier and economic policy analysis in the United States. Contemporary Economic Policy , 33 (4), 735-746.
