The United States deficit hasn’t been this high since 2012. In the first 11 months of the fiscal year, the US has experienced a budget gap of $1 trillion. But while this itself is alarming, it isn’t more alarming than the total national debt: presently $22.5 trillion. Analysts blame the United States’ budget: the expenses have been outpacing income consistently. But in order to pull this back, budget cuts will likely be required.
So, how did it come to this in America? Could the very things that have helped the economy also threatened its future? What does this mean in the long term? Let’s take a look.
Tax Cuts May Have Contributed, But Revenue is Growing
A portion of the new deficit is due to the considerable tax cuts that were given out to businesses and individuals throughout the last year. These tax cuts were intended to create economic stimulus, ideally paying for themselves. It’s not yet known whether they actually will. Revenue has been growing, even at a slow pace. It is still possible that the true consequences of these tax cuts haven’t yet been seen.
In theory, tax cuts for businesses encourage businesses to create jobs. Creating jobs makes the economy as a whole more stable. This is a principle of supply-side economics (which has had some widespread criticism in the past). But this is also a slow process. If the theory works, the current enhanced deficit could potentially be an investment in the future.
But analysts are skeptical regarding whether this revenue acceleration will really pan out, especially with confounding effects such as the trade war.
The Dangers of a High Deficit
For most people, there’s an understanding that a high deficit is bad for the economy. But how bad is it, really? Since countries operate in almost theoretical numbers, and are always trading debt with each other, the true impact of a deficit can be questionable.
Budget deficits usually lead to a slowed economy, because the government can contribute less to economic stimulus and growth. Programs can be halted entirely, if the budget is over-extended. This creates a cyclical effect. The depressed economic growth leads to more depressed economic growth, and it becomes a challenging situation to recover from without a bailout from another country.
Politically, a deficit is a challenge. The sitting president is usually under fire when a deficit occurs, even if the deficit was from before their time. Economies do move slowly, and often the true consequences of economic policy isn’t seen until years later. However, that cuts both ways. Poor decisions that are made now could impact the American economy for years (or even decades) to come.
There are concerns that a deficit paired with a recession could lead to some severe consequences for the current administration. Analysts have noted that even though a recession is looming on the horizon, the government doesn’t appear to be prepared to deal with the recession. While a recession has been discussed over the past few years, the neither side of the government has created any real strategies to deal with the upcoming economic woes.
Resolving a High Government Deficit
To resolve a high government deficit, there are two direct tactics: reducing spending and increasing taxation. As no candidate wants to be the one to propose increased taxation, spending reduction is usually the best political path. Budgets will need to be slashed in order to recover from the deficit, and some government branches could experience a shut down. Unfortunately, the budgets have been increasing in size, which is what has led to the deficit rising so sharply to begin with.
Apart from this, the country simply needs to hope that the economy starts to grow. The current trade war has been suppressing the current economic condition. If the trade war is resolved, it’s possible that the economy could begin to grow again. If the trade war is won, the eventual results could be even more significant — but that does presumed that the trade war is winnable.
For the average person, the government deficit doesn’t have any direct consequences. But for investors and entrepreneurs, it’s a sign that the economy could be tightening moving into the future. Though interest rates are presently very low, lending is likely to slow as the economy continues to slow. Small business owners and entrepreneurs should be cautious about high risk investments during this time, because a recession may still be in the cards.