"The National Debt" Please respond to the following:
•Analyze how budget surpluses and deficits impact national saving, interest rates, and
economic growth. Take a position on whether the government should maintain a budget
surplus or budget deficit. Justify your response.
An increase in the budget deficit reduces national saving unless it is offset by an increase in
private saving. If national saving falls, then national investment and future national income
also falls. In other words, to the extent that budget deficits reduce national saving, they
reduce future national income. This reduction in future national income occurs even if the
reduction in national saving associated with budget deficits manifests itself solely in
increased borrowing from abroad.
An increase in the budget deficit (a decline in public saving) reduces national saving unless it
is fully offset by an increase in private saving. The empirical evidence suggests only limited
offsets from private savings in response to budget shifts
An increase in the budget deficit (a decline in public saving) reduces national saving unless it
is fully offset by an increase in private saving. The empirical evidence suggests only limited
offsets from private savings in response to budget shifts.
A reduction in national saving must correspond to a reduction in national investment and in
future national income, other things equal. That is, the decline in national saving must reduce
private domestic investment, net foreign investment, or some combination thereof. The
reduction in investment reduces the capital stock owned by Americans, and therefore reduces
the flow of future capital income.
A reduction in national saving must correspond to a reduction in national investment and in
future national income, other things equal. That is, the decline in national saving must reduce
private domestic investment, net foreign investment, or some combination thereof. The
reduction in investment reduces the capital stock owned by Americans, and therefore reduces
the flow of future capital income. Either the domestic capital stock is reduced (if the
reduction in national saving crowds out private domestic investment) or the nation is forced
to mortgage its future capital income by borrowing from abroad (if the reduction in national
saving generates a decline in net foreign investment). In either case, future national income is
lower than it otherwise would have been.
•Explain the impact of the debt burden on future generations and give your opinion as
to what the government should do to reduce the budget deficit.
Ans: Greater debt burden will affect the standard of living for future generation as they will
have to service the interest payment and also they will have higher tax burden. The increased
consumption by the present generation crowds outs investment and reduces the growth of
capital goods. The future generations will have smaller capital stock and wealth. To reduce
the budget deficit, the government should adopt:
- Progressive tax structure so that the wealthier pays more taxes
- Government should look for ways to increase the national GDP and productivity of the
industries
- The budget deficit should be reduced and also unnecessary government expenditure should
be curtailed or reduced
Budget deficit has been described as an accumulation of debt burden to be borne by future
generation, hence, raising moral questions about the fairness of such policy. Some school of
thought and as well in my opinion, this is not a burden to be put on future generation as being
speculated, although future generation must service the debt. It is a fact that if U.S. citizens
sacrifice present consumption for bonds purchase today, they or their heirs will be repaid, so
debt service payment stays in the country. Thus, future generation both service the debt and
receive the payment. In that sense, the debt is not a burden on future generation. It is all
within the same house, as a matter of facts. Again if the debt incurred today is put into
judicious use, say, it is use to develop infrastructure that can be use for the next 50 years, it
will boost investment and increase tax payment (both individuals and corporate) and the debt
can be paid before the generation that we expect them to pay grow. The capital assets
developed today can be sustained for the next generation to come and use and therefore
benefit from it use. Which means there will be no need to think about how to develop
infrastructure again because they are already in existence? What the government should do to
reduce budget deficit is to preserve what we have now developed from budget deficit so that
it can last long to serve it purposes (Hyman, 2011).
References
Hyman, D. N. (2011). Public Finance. Mason: South-Western Cengage Learning.