"Government Expenditures" Please respond to the following:
•Suppose the federal government balanced the budget and no longer ran a deficit.
Speculate how this would affect interest on the federal debt. Justify your response.
A federal government balanced budget is the one with revenues equal to expenditure, and
neither a budget deficit nor a budget surplus. More generally, it refers to a budget with no
deficit, but possibly with a surplus. Many a time, the federal budget need not balance but the
state and the local government’s budget must balance. Therefore if the federal budget do
balance and possibly end up in surplus as happened in 1998 through 2001 then the
government can fund all its expected expenditure without resorting to borrowing. This means
in the absence of government borrowing to compete with the private sector more money will
be left in the financial market and in the institutions. Thus, supply of money will increase to
justify the demand of the private sector and interest rates will not rise as much as when the
government will engage in borrowing with the private sector and the individual household.
This is because the government always borrows more and reduces the amount left for the
private sector to lay hands out, hence, increases interest rates to discourage, crowd out, some
private investment, reducing the stimulating effect of the government deficit. If the private
sector is not able to supplement economic growth the government has to use fiscal policy
through transfer payment by means of borrowing to increase federal debt that results in
increase interest rates. So with a balance budget there will be no more crowding out,
associated by higher interest rates. Again, government interest payment on debt servicing
will no longer be there and the burden assumed to be on future taxpayers will no longer exist
(McEachern, 2012).
High Federal budget deficits tend to raise interest rates and “crowd out” other borrowing. If
the federal government is having a large deficit then it has to borrow heavily to make up for
the shortfall. When the budget deficit is high, treasury bonds must be sold to finance the
deficit, the government is forced to offer higher rates of interest to sell enough bonds. Since
the interest rate on treasury bonds is the single most important rate of interest within the
broader economy, this tends to elevate all borrowing rates from mortgages to the interest
consumers much pay on credit card debt. If there is no federal deficit then the interest rate
would be low and stable.
In my opinion a balance budget does not mean cutting spending and increasing tax but rather
a federal balance budget will be the one in which expected revenues equal to expected
expenditure, and neither a budget deficit nor a budget surplus is achieve. In reality, a federal
government balance budget may mean there is no deficit and a surplus is attained. In this case
government will not resort to borrowing money from financial institutions to reduce the
amount of money in circulation to increase interest rates and also create crowding out effect.
There will be no interest payment to service national debt and this money will be a gain to
society through no increase in tax rates on our paychecks.
•Evaluate the impact of an aging population on state and local government
expenditures. Suggest strategies that government should take in dealing with this
situation. Justify your rationale.
An aging population may have a direct impact on many other components of state or local
government spending—like prisons, highways, or social services. Aging population can
affect the state income tax collections. The impact of an aging population on sales tax
revenues will depend on age-specific expenditure patterns and expenditure-specific
exemptions from the sales tax base. For instance, the exemption of medical services and
prescription drugs from the sales tax in most states suggests that revenues may decline as the
population ages. State and local governments will be impacted by the aging population just as
the federal government will be. It has been projected that by the year 2050, 35% of the
population in the United States will be over age 65. This will increase government spending
on social security and health care benefits by a large amount. Local governments will also see
a large increase in spending on health care and benefits for the poor. There will be a need for
more nursing homes and hospitals and other health care expenses. The State and local
governments will have to meet these costs and will possibly not be able to depend on the
federal government for help. The only way that I see that this can be solved is to increase the
social security tax rate, rise the age of retirement, and increase the deficit. There does not
seem to be a sure fix for this problem. The good news is that ll of the data is based on
predictions that could be wrong.
The impact of an aging population will show an increase in the dependency ratio. This means
that there will be more people claiming benefits such as state pensions and less people
working and paying income taxes. Increased government spending on health care and
pensions. Also, those in retirement tend to pay lower income taxes because they are not
working. This combination of higher spending commitments and lower tax revenue is a
source of concern for Western governments - especially those with existing debt issues.
Those in work may have to pay higher taxes. This could create disincentives to work and
disincentives for firms to invest; therefore there could be a fall in productivity and growth.
Shortage of workers. An aging population could lead to a shortage of workers and hence
push up wages causing wage inflation. Alternatively, firms may have to respond by
encouraging more people to enter the workforce, through offering flexible working practices.
An increase in the numbers of retired people will create a bigger market for goods and
services linked to older people (e.g. retirement homes).
The aging population hits us from two fronts: decreased tax revenue as the elderly retire and
over-all productivity decreases, and increased costs as the government has committed itself to
providing supports to the elderly. State and local governments will be impacted 1) due to the
squeeze that the federal government will feel as it increased pay transfer payments, 2) from
decreased revenue as residents retire and stop paying taxes, and 3) from increased demand for
health, food, and housing supports. Aging population always has effect on government
expenditure through social insurance like health care benefit and transfer payment (food
stamp) for poor old people. The best way to solve this problem is for the government to
implement a law for mandatory retirement account for all and also anytime the budget ends in
surplus, such money should be used to set up one big retirement investment account to care
for old age expenditure.
Much of the impact has had a more problems on the social security expenditure and
expenditure on health care under the Medicare and Medicaid programs. The aging
population has shut up more than expected over the last few years and the revenue from the
Medicare and Medicaid tax is not enough to cater for these expenditures by the government
on the aging population, hence, most states and local governments will have to turn their
attention to budget deficit to finance such programs and its interest rates burden effect. Again,
the impact is also felt on the income security program that provide support for old age people
with low income to avoid poverty and premature death which is a social canker that also have
a serious impact on state and local governments expenditures (Hyman, 2011).
Some of the best strategies government can take to deal with this situation include;
encouraging a comprehensive retirement planning for all. This can be possible when the
population is well educated to secure well paying jobs to get enough income to save towards
retirement. Thanks to the U.S. for its well retirement account for most people because the
social security is a base, not enough. In such situation government can turn the voluntary
retirement account into mandatory retirement to provide enough old age care with
supplement from the government as a lasting solution (Korn, 2012). The government should
use the following strategies to deal with the aging population issue
1. Increase participation rate. Make it easier for people past 65 to keep working.
2. Increase the retirement age. The government has already proposed an increase to 67. The
retirement age could automatically be linked to life expectancy.
3. Increase the importance of the private sector in providing pensions and health care.
However this may cause increased inequality if people can't afford private pensions.
4. Increase tax to pay for pension costs. But, many governments already have limited
budgets.
References
Hyman, D. N. (2011). Public Finance. Mason: South-Western Cengage Learning.
Kor, M. (2012, August 6). Retrieved January 11, 2013, from America’s Retirement System Is
Failing Us: Economist: http://finance.yahoo.com/blogs/daily-ticker/america-retirementsystem-failing-u
McEachern, W. A. (2012). Macroeconomics, 3rd Edition. Mason: Cengae Learning.