The increase in national debt and deficits is due to the long-term insufficiencies brought about by an aging population and uncontrolled healthcare spending. To reduce the deficits by a considerable margin, Congress is required to cut spending or increase taxes. To reduce the deficit by $300 billion, it would be important that spending should be trimmed so that funds are saved. Any anti-saving biases resulting from policies must be removed. Through taxation policy, close to $ 130 billion could be realized. These are fiscal policies that are beneficial as they ensure effective stabilization by minimizing how severe peaks and troughs are in the business cycle. Other advantages are reduction in inflation rate and stimulated economic growth during times of recession (Mckinnon, 2)
Mckinnon (2010) asserts that spending cuts involve reduction in expenditure by the federal government. Measures to ensure deficit is reduced effectively involve particular changes in spending, entitlements together with taxes to get to the 60% target. Some of these include nervy suggestions to cut military pay, raise the age for retirement, abolish farm subsidies, cut tax holidays for homeowners and business entities, increase Medicare premiums and enforce a new tax on carbon emissions. Marien (100) explains that spending on weapons systems ought to be trimmed or an alternative developed or adopted to enable saving of at least $ 30 billion. Alternatively, eligibility for Medicare can be delayed until the age of sixty seven.
According to Skidelsky (2), expansionary fiscal contraction, a policy that slashes the deficit by partly increasing taxes and mostly a cut in expenditure will increase the rate of economic recovery and ensure stability. So as to trim spending on military so that the defense budget is reduced from approximately 5% per annum to 3%, reordering of priorities, trimming the build up on defense and improving procurement should take place. By taxing half of benefits from social security for all taxpayers, incorporating excise duty on gasoline and cigarettes, increasing taxes on alcoholic beverages and taxing domestic and imported oil tax revenue can be increased.
A breakdown on how the $300 billion cut in deficit will be realized is as follows; altering the Social security and Medicare systems will save about $35 billion, doing away with farm subsidies will ensure $10 billion is saved, pruning the Defense structure will bring $35 billion, cutting back government expenditure on its Bureaucracy by $25 billion, slashing Federal grants by $30 billion. The rest of this amount will be realized through the tax measures adopted (Marien, 94). Preferably a pure expenditure tax and a modified flat rate income tax. A national sales tax and consumption taxes are sure measures of enabling considerable increase in tax revenue. A permanent increase in taxes by 7.5% across the board will reduce the remaining amount to a desirable level. This would produce approximately $50 billion (United States Department of the Treasury, 1)
Very high deficits result in unmatched real interest rates. This in effect leads to economic growth at a decreasing rate in the long-term, a much overvalued currency, an unfavorable balance of payments, increased national debts, crippling export sector, depression agriculturally and limited capital consumption (Bowyer, 2). By adopting the above policies of spending cuts and tax increases, apart from reduction in budget deficits, there will be stimulated economic growth and capital formation.
These two policies however have certain drawbacks. Citizens respond much more favourably to tax cuts and government purchases than what is put forward. The period of time between the implementation of a policy and its impact on the economy is long. This is called impact lag. If not well-handled such policies can also exacerbate inflation. These however are not reasons enough to necessitate a change of policy. Such drawbacks can be overcome (Bowyer, 1).
Marien, Michael. Future Survey Annual 1984: A Guide to Recent Literature of Trends, Forecasts. New York: Transaction Publishers. 1985, pp. 94-107.
Bowyer, Anthony. Fiscal Policy. 06, Nov 2010. Web. 7, Feb. 2010 <http://www.economicshelp.org/macroeconomics/fiscal-policy/fiscal_policy.html>
United States Department of the Treasury. History of the U.S. Tax System. 06, Nov. 2010. Web. 6, Jan. 2001 < http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml>
Mckinnon, John. Deficit Panel Stresses Spending Cuts. 06, Nov 2010. Web. 1, Jul. 2010 <http://online.wsj.com/article/SB10001424052748704334604575339272679764964.ht>
Skidelsky, Robert. When Confidence is shattered. 06, Nov 2010. Web. 26, Oct. 2010 <http://www.skidelskyr.com/site/article/when-confidence-is-shattered/>