As we are proceeding towards an economically healthy time-period with the help of debt relief options and debt settlement companies, it becomes more than important to gain information about certain financial terminologies and prominent processes. Herein we would talk about the relation between US debt and UD deficit. To start with, one should know that the US federal deficit is when government spending is greater than revenue received for that year. In 2011, the budget deficit will be $1.267 trillion, whereas the 2010 US federal debt is over $14 trillion. Now, each year, the deficit is added to the debt. The Treasury must sell Treasury bonds to raise the money to cover the deficit. This is known as the public debt, since these bonds are sold to the public. In addition to the public debt, there is the money that the government loans to itself each year. This money is in the form of Government Account Securities, and it comes from the Social Security Trust Fund. These loans are not counted as part of the deficit, since it is all within the government.
The debt affects the deficit in three ways. First, the debt actually gives a better indication of the true deficit each year by comparing each year's debt to last year's debt. That is because the amount owed to the Social Security Fund is a debt that will need to be repaid one day, and so the amount borrowed from it is a more accurate description of the government's liabilities than the reported budget deficit. Second, the interest on the debt is added to the deficit each year. About 5% of the budget is allocated to debt interest payments. Third, the debt can decrease tax revenue thereby increasing the deficit. As the debt continues to increase, creditors can become concerned about how the U.S. government plans to repay it. Initially, deficit spending and the resultant debt can increase economic growth, however in the long run the resultant debt becomes damaging to the economy. The U.S. government may be tempted to let the value of the dollar fall so that the debt repayment will be in cheaper dollars, and less expensive. As this happens, foreign governments and investors will be less willing to buy Treasury bonds, forcing interest rates higher. As this debt comes due when Baby Boomers retire, funds will need to found to pay them. Not only could taxes be raised, which would slow the economy, but the loan from the Social Security Trust Fund will stop. More and more of the government's spending will need to be devoted to pay this mandatory cost. This would provide less stimulation, and could further slow the economy.
No comments:
Post a Comment