At the begging of 2009, The United States had amassed over $12 trillion in federal debt. As the nation continues to face an ever-expanding financial and economic crisis, the federal unfunded liabilities have accumulated to an all-time high of $44 trillion. More than 70 million baby boomers are expected to retire from the workforce in the next few years, at a time when the cost of health care is rapidly rising, putting a lot of strain on the Medicare system and Social Security systems. This means that the United States will continue to face severe fiscal challenges in the long term, which could lead to high-interest rates, declining economic growth, sharp tax hikes, inflation, and major cutbacks in federal government spending.
Spending beyond the means
In the past years, the government has been spending more than it takes from taxes. This spending beyond the means requires the federal government to continuously borrow money to “cover its bills, and the government is routinely running big deficits, not just for emergencies or during recessions, but for everyday operation expenses” (Public Agenda). This continued borrowing leads to increased national debt, which further complicates the nation’s financial woes. In essence, every time the federal government is unable to cover day-to-day operations bills, it results in deficits, which increases the national debt.
The federal government has already made promises to spend a huge amount of money to fund Medicare and the Social Security System in the future. This has increased unfunded liabilities to $44 trillion. Unfunded liabilities represent the amount of money that the federal government is going to spend in the future. Domestic discretionary and mandatory spending such as Medicare, defense, Social security will increase to more than $53 trillion in the next 40 years.
How much does the government spend
To better understand the current national debt crisis, it is important to have a closer look at the amount the government takes in from the taxes program and how much is spent. Individual “Income taxes constitute 45 percent of the federal government income” (Young). The social security system is funded by employers and employees, contributing 34 percent of federal tax revenues. Small businesses contribute 14 percent while other smaller taxes like sales taxes bring in 7 percent.
After taking in money from the tax program, the government spends it on both Mandatory and discretionary spending. Mandatory spending account for half of the government expenditure. “The federal government is obligate by the law to make payment on mandatory programs like Medicare and Social security” (Public Agenda). National defense, transportation, and education, post office, national park, etc fall under discretionary spending. 8.5 percent in furnishing interest on debts, 40 percent is spent on Medicare, Social Security, and Medicaid. 20 percent goes to defense while 16 percent is for discretionary spending on programs such as federal student loans, roadways, and so on. (Public Agenda) Already, United States is paying up to $240 billion; on furnish interest on the national debt (MULLIGAN)
Having signed a law “authorizing the U.S. Treasury to borrow an additional $1.9 trillion” (Jeffrey), President Obama’s administration might end up becoming the biggest spender since 1930. Currently, the US congress estimate that the budget deficit for the year ending September 30th is on a record high at $1.4 trillion (Young). This deficit is “equals to 9.9% of gross domestic product (GDP) – more than triple the 2008 level and the highest since the end of World War II” (US deficit ‘hits record $1.4tn). The deficit has been attributed to increased federal government spending and reduced tax revenues.
The Federal government increased deficit for the 2008-2009 fiscal year was largely caused by a relief program to save big financial firms and the rescue of mortgage giants like Fannie Mae and Freddie Mac, which received a total of $787 billion in stimulus (Public Agenda). Unemployment benefits have also been a huge burden as jobless figures remain at an all-time high of 9.7 percent. This huge deficit is worrying the investors who are willing to purchase US treasury bonds, in fear that the situation could worsen in the future.
How the huge federal spending and debts affect individual’s taxpayer
The big question at this point is how the huge federal spending and debts affect individual taxpayers and US citizens. With continued massive spending on Social security, Medicare, tax policy, and escalating debts, the government will finally end up having no money to spend on both mandatory and discretionary expenses, leading to huge budget cuts. Cutting the discretionary spending will mean that essential services such as student loans, national parks; medical research, etc will not receive funding. This will have a huge negative impact on individuals and society as a whole.
If nothing is done to collect the huge debts and reduce spending, there is a possibility that most benefits will be cut. Benefits to seniors, unemployed, etc will have to be cut to reduce the deficit. Already the federal government project that it will not be possible to pay full Social Security and Medicare benefits as promised shortly. Increased interest rate is another possibility that Americans might have to face shortly. As the government continues to borrow, interest rates for everyone else go up, and the public borrowing power goes down. The federal government will face tough terms coupled with higher interest rates from lenders if the financial crisis continues to deteriorate. Higher interest rates for the federal government will mean a higher interest rate for everyone else.
Increased tax rates are imminent if nothing is done to curb spending. Government interest will most likely take all tax revenues leaving nothing to spend to take care of other expenses. As a result, the Government might result in tax hikes to increase revenues. The federal government might be tempted to print more money to pay national debts. This may result in hyperinflation which will affect investor and anyone else trying to save as the price of good rise.
Looking back at the past 20 years or so, there seems to be a pattern in which the federal government has been spending more than it can raise in tax revenues. Oftentimes, money has been borrowed to cover the deficit, which has resulted in the current huge national debt. The most important issue now is to find ways to solve the crisis. The government will have to make choices which might include “establishing zero tolerance for deficit spending, Limit deficit spending to nonemergencies situation, permit limited, responsible borrowing to make critical National investments” (Public Agenda)
The realization that any debt is a bad debt will result in zero tolerance to debts where no money will be borrowed to cover government expenditures. The government should learn to operate within its means. This practice has brought a lot of benefits to many States where it’s practiced. If it can work at the State level, then it can also work within the federal government. To make these possible, lawmakers should pass strict legislation where any spending bill that is passed, is accompanied by another bill showing how the spending will be offset. The legislature should be held accountable to ensure that there is no exception to these laws.
To avoid being too strict on the federal government, there should be leeway that will give the government power to borrow during emergencies such as war, natural disasters, etc. A bill should be established offering guidelines as to what constitutes an emergency, thus making it hard “for politicians to call anything they want an emergency and fall back into old habits of deficit spending” (Public Agenda). To make this a reality, a modest emergency fund should be created, so that borrowing is only reserved for major emergencies.
The government should also be able to invest in areas that span national growth, including roads, education, disaster preparedness, and new technologies. There is a need to permit limited and responsible borrowing to make such investment possible. With restricted and accountable borrowing, it will be possible to control excessive debt while at the same time permitting a “reasonable amount of responsible borrowing that serves the nation well” (Public Agenda). There is a need for government to consider budget planning that covers two to three years to avoid borrowing on annual basis. Money borrowed to finance longtime projects should also be paid on a long-term basis to match the project progress.
The massive federal spending on both mandatory and discretionary expenses has resulted in $12 trillion in federal debts and a further $44 billion in unfunded liabilities. The government has been spending more than it can collect from taxes revenue, leading to the budget deficit, which currently stands at 1.9 trillion. If the current financial crisis is not addressed it may lead to benefits cuts, tax hikes, increased interest rates coupled with tougher borrowing terms for both the government and individuals. To curb the escalating national debts and reduce excessive spending, the Federal government will have to take and fully support tough measures which include establishing of policy and legislation that limit deficit spending to nonemergencies situation. There should also be zero tolerance for deficit spending and limited, responsible borrowing for critical national investments.
CCAGW. “Taxpayer Groups Speak Out Against Feigned Fiscal Conservatism.” 2008. Web.
Jeffrey, Terrence. “Obama Defeats FDR (in Spending Other People’s Money).” 2010. Web.
MULLIGAN, CASEY. “Inflation and Government Spending.” 2009. Economic. Web.
Public Agenda. “Heading for Trouble.” 2010. Facing up to Nation’s Finances. Web.
Romer, Christina and David Romer. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press, 1997.
“US deficit ‘hits record $1.4tn.” 2009. BBC News. Web.
Young, Mitchell. Government Spending. Boston: Greenhaven Press, 2009.