UNIVERSITY OF HOUSTON
MASTER OF PUBLIC ADMINISTRATION
BUDGETING FOR PUBLIC AGENCIES
SHORT PAPER 2
NOVEMBER 3, 2010
Debt is like any other trap, easy enough to get into,
but hard enough to get out of.
Henry Wheeler Shaw
THE DEBT CRISIS CANNOT BE SOLVED WITH MORE DEBTThis short paper seeks to analyze the current federal budget situation of the United States. Based on the concepts learned in class, we will discuss the alarming levels of public indebtedness of the country. First, we will look at the theoretical concepts that permits approach the debt issue. Second, we will analyze the current situation of U.S. debt. And finally, we will try to create somesolutions to the debt situation.
The five factors that cause a financial crisis are interest rates increasing, uncertainty perception, asset market effects on the sheets balance of institutions, problems in the banking sector and the government's fiscal imbalances. Hence, U.S government influences the economic behavior through two key policies: monetary and fiscal. The first is used by the centralbanks to intervene indirectly in the economic activity, by intervening in the money supply through open market operations, discount rates and reserve requirements. The second modifies the taxes level and rates, the spending composition and measures, and the debt grade and forms.
The public debt includes all of the liabilities contracted by the U.S government, including the loans purchased bythe regional or municipal entities that are public properties. Basically, the debt origin appears for the need of financing the government budget deficit. The fiscal deficit is based on revenues and federal expenditures. The first one depends on the taxes on the economy (income, business, property, and consumption taxes). The expenditures are given by investment concept, transfers to the privatesector and public debt interest acquired in the past, as well as current and capital expenditure. Therefore, the budget deficit is a function of the difference between expenditure and revenue which is financed by printing money -Deficit monetization- and new debt. Some studies find that there is a tendency on the total public expenditure increases relative to the Gross Domestic Product (GDP). Thistheory is known as the Wagner Act.
The deficit has two components: primary and financial. The first one is the result of the cyclical behavior of the economy. The principal difference between them is that the primary is related to the transitory movements in the economy, and the financial contains the existing structural deficit. The government finances its budget deficit by contracting loans.Through its Treasury, the government issues debt bonds which are sold to the public or banks, and occasionally, to the central bank. Hence, the difference between initial and final debt could be determined mainly by the fiscal deficit.
Other governmental resources for dealing with the budget deficit are the monetization and the use of international reserves. On the deficit financingvia monetization or “signorage”, the revenue received by the government is a result of its monopoly power to print money. As a consequence of the monetary expansion, the economy can experiment deterioration of the real balances, inflation.
One of the reasons that historically has provoked governmental overdraws in the public accounts is the need of helping its political party inpre-election periods by implementing popular policies through no-restriction transference expansion and tax reductions. Other causes of the high deficit are the output fluctuations which depend on the business cycles of the nation and the war costs, as well as the interests of large amounts of debt previously acquired and accumulated.
Negative fiscal imbalances can create basically two...
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