Fiscal policy refers to the strategies in which governments adjust both their tax rates and spending in an effort to impact over and above monitoring the economy of a country. The United States is the world’s largest economy with a gross domestic product of approximately seventeen trillion dollars. At the start of this year (2017), there was a change of administration with a Republican President Donald Trump taking over from a Democrat President Barrack Obama. On that background, this paper will delve in giving an outlook of the US policy today as well as with the former administration.
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President Obama rarely discussed the status of the federal budget in public fora’s primarily because the public seems to care more about how tax policies and government programs stood to affect them compared to the former (Auerbach and Yuriy 141-145). For the last seven years the US has been under the previous regime, the federal government borrowed approximately eight trillion. Notably, this marked a forty percent growth in national debt from six trillion dollars in 2008.
At the moment, the fiscal policy of the federal government has been largely subject to the ongoing expansion of government transfers over and above the great recession. During the previous recession, the fiscal measures that were adopted resulted in unprecedented magnitude deficits. Markedly, they affected the normalization period that was politically contentious and the post-war period. The continuing growth of the country’s welfare net as well as in transfer’s signals a foreseeable future marred with rising deficits.
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President Obama assumed office at a period when the US was experiencing a terrible recession, and he immediately requested for an 800 billion stimulus package, which was approved by the Congress (Auerbach and Yuriy 142-144). The stimulus was expected to caution Americans and the world economy from rising inflation coupled up with high unemployment rates. Fundamentally, unemployment rates were reduced to margins of five percent by the end of his presidency although not to zero point, which is economically impossible (Alesina and Silvia 41-62). In addition, the increase in the extended unemployment benefits stood to caution the affected from extreme economic hardships.
The 800 billion stimulus package was not enough to completely get the economy back on its feet after such a recession. A bigger boost would have gone a longer way in aiding the economy recover fully and seven years of needless suffering would have been arrayed. Markedly, the impact of the stimulus package was similar to predictions by Keynesian Stewart. Unemployment projections by the president’s council of economic advisers was below 9 percent; instead, it grew to over 10 percent.
The revenue collections before the great recession were approximately 18 percent of the GDP. The recessions in 2007 and 2009 prompted a tax provision series that lead to significant reduction in tax revenues. By 2013, higher income earners became subject to permanent cut rates that previously targeted specific taxpayers. Consequently, there was normalization of revenues as GDP shares, and in the next ten years, they are projected to average at 19 percent (Harvey 76-111).
Averagely, revenues are smaller than outlays, which are explained by the interest paid on a debt. It is during the 2000s that a reversal of a downward trend involving outlays as a share of the GDP happened. An enormous surge of outlays has been the resultant of a series of fiscal actions taken to curtail the great depression. It is worthy to note in those seven years that the outlays surge reached 25 percent, which was a post-war record (Alesina and Silvia 36-51).
In economics, debt accumulation is defined by deficits. Until the great recession, there was a decline in federal debt as a GDP share. The period between 2009 and 2013 was characterized by enormous deficits that more than doubled the public debt. By the end President Obama’s regime, the federal debt had reached seventy-five percent, and it is estimated to reach over 85 percent in the next decade. Indeed, these estimates are extremely high for US economy peacetime in comparison to other developed country’s debt levels.
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The unprecedented growth of entitlement spending is the primary problem facing federal budget. Since the mid-nineteenth century, the United States has made a myriad of commitments, which spells doom for the American taxpayer. For instance, in the 1960s, the federal government expenditure on entitlement programs was tantamount to five percent of the GDP without the inclusion of offsetting receipts (Alesina and Silvia 46-67). During the last seven years, expenditure on the same programs has grown to thirteen percent of the GDP. Based on CBO projections, the expeditors are expected to reach 18 percent in the next few decades. In essence, this is resulting into pressuring the federal budget excessively making it difficult for economy expansion (DeLong and Lawrence 261-296).
Politics have played the central role in taking the situation to the status, which has forced policy maker to change strategy over the last three years (Hansen 67-77). They have opted to pursue the partially political path with a major focus being to place curbs on appropriate spending. Though it is the longer route, it has seen a dramatic reduction in expenditure on defense as well as domestic agencies and programs (Bianchi 169-171). Previously, defense spending averaged at 5 percent of the GDB, but over the last seven years, it has dropped to 3.5 percent of the GDP. Certainly, under President Obama’s fiscal policy, the decline was expected to drop to less the 23 percent, but this might not be the case with President Trump at the White House.
The tremendous growth of public debt over the last seven years will only stagnate the economy and trend is likely to continue for next few years. The federal government ought to provide employment for Americans by way of financing research, infrastructural expansion, and cutting of taxes among others (Auerbach and Yuriy 141-146). However, with a massive debt to pay the federal government may be forced to continue servicing the loans at the expense of creating jobs.
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A majority of the policy makers believe that appropriation as an effort to downsizing annual expenditure has remained on track over the last seven years and continues to do the same. Even though it is highly likely that the new administration will raise defense spending with regard to fighting ISIS, the long-term goal of cutting the same will be realized. On the same note, there has been a huge gap between medium and long-term expenditure and expected revenue. This is mainly because of the numerous commitments that the U.S. has both internally and externally (Bianchi 167-172). A majority of the commitments involve international funding and supporting its developing allies. Certainly, a fiscal policy included towards that edge is the one that continues to affects the U.S. economy stability (DeLong and Lawrence 241-28).
Over the last seven years, the US economy has been growing at an average two percent whereas it has the potential to grow at over 3 percent (Harvey 121-134). Such a growth rate translates to an underperformance of the economy resulting in massive instability. Consequently, this has been as a result of practicing the fiscal austerities of tax increases and deep spending cuts. Ironically, the U.S. has been criticizing the European Union for practicing such measures (Alesina and Silvia 53-68). Remarkably, the U.S. economy has been a contractionary one characterized with an amalgam of government’s spending and tax actions at all levels including local state and neonatal. On the contrary, the best strategy would be the decisions being made in a single set.
The contractionary policy translates to a reduction in government expenditure especially on the deficit, which has been the case in the United States. In the recent years, curtailing of spending in military and other government agencies have been the trend. As a result, the problem of unemployment continues to persist since by cutting expenditure on such agencies, it forces retrenchments of staff while freezing new hiring at the same time (Auerbach and Yuriy 141-143). In my opinion, the reduction by the federal bank on monetary expansion rates has resulted in a decrease in the nominal gross domestic product. Consequently, this means that the commercial banks are forced to realign their lending habits thereby making it difficult for the public to get loans (Hansen 121-143).
The role of marinating price stability in the United States falls under the federal government, and the contractionary type of fiscal policy has made it a tenacious task. There has been significant growth over the last seven years characterized by a surge in increased consumer spending. Apparently, there has been remarkable personal income growth signifying labor markets progress (Alesina and Silvia 35-47). In addition, the spending has been influenced by household balance sheets experiencing a continuous improvement. Since the end of the financial crisis in 2015, there has been a significant gain in the stock prices. Besides, household purchasing power has been influenced by the lower energy prices that which stand to benefit the US economy in the long term (DeLong and Lawrence 233-267).
The fiscal policy in the last seven years has forced various U.S companies to relocate to other countries with fairer tax systems. Consequently, this has taken away a huge chunk of employment opportunities that would otherwise benefit Americans (Harvey 43-86). On the other hand, the soft post of the economy has favored the manufacturing sector in a significant way. Recently, the dollar has been on the upward trend, which stands to benefit companies with international presence (Bianchi 167-171). Similarly, the continued strengthening of the dollar signifies a prolongation in terms of U.S. economy growth. In the long run, business and individuals stand to benefit from better terms of trade just because of a strong dollar.
President Trump’s administration is faced with the task of formulating a fiscal policy that will have the interest of Americans first if they stand to solve critical problems facing the economy. Over the last seven years of President Obama, the national debt that has continued to grow needs to be addressed. Subsequently, the U.S owes countries such as China and others a total of eighteen trillion dollars. Revered economists advocate for the current regime to maintain a sustainable fiscal position for the Uncited States. Over time, fiscal policy should envision to stabilize the public debt ratio or one that is on a reasonable decline status. Over the last seven years, government public debt has hit an all-time high, and this asks the federal government to keep it below seventy-five percent, which should thereafter be followed by a downward trend (Harvey 93-126).
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Based on the nominal GDP, the federal debt is at over 100 percent, which translates to an 18 trillion dollar economy facing a 19 trillion dollars debt. In the last seven years, the interest on debts was extremely high making it difficult for the Republican administration to address the issue squarely (DeLong and Lawrence 272-295). Since the period of great recession, low-interest levels have held down interest expense on the federal debt. During the 2015 -2016 financial year, the interest expense stood at 50 billion dollar, which is approximately three percent of the GDP. It is worthy to note that a rise in the interest expenses signals an increase in interest rates.
To sum up, a fiscal tool is a fundamental tool that enables governments to manipulate and guide the economy towards progression. Over the last seven years, the United States economy has experienced shifts resulting from its fiscal policy. Price stability has been relative marked with a considerable growth in consumer spending and low inflation. Unemployment rates have been cut by half with the current stand being 5 percent compared to ten percent seven years ago.
- Alesina, Alberto, and Silvia Ardagna. “Large changes in fiscal policy: taxes versus spending.” Tax policy and the economy 24.1 (2010): 35-68.
- Auerbach, Alan J., and Yuriy Gorodnichenko. “Output spillovers from fiscal policy.” The American Economic Review 103.3 (2013): 141-146.
- Bianchi, Francesco. “Evolving monetary/fiscal policy mix in the United states.” The American Economic Review 102.3 (2012): 167-172.
- DeLong, J. Bradford, and Lawrence H. Summers. “Fiscal policy in a depressed economy.” Brookings Papers on Economic Activity 2012.1 (2012): 233-297.
- Hansen, Alvin H. Fiscal policy & business cycles. Routledge, 2013.
- Harvey, Philip. Securing the right to employment: Social welfare policy and the unemployed in the United States. Princeton University Press, 2014.