National Debt, Research Paper Example

Introduction to National Debt

The national debt is a term used to refer to the money or its equivalents in credit that the government owes at any level.  It spans from local governments through municipal government as well as federal and state governments.  The money owed at any of these levels constitutes part of the national debt.  It is also known as public debt since the money is owed for past expenditures on public infrastructure and facilities.  The difference between government expenditure and receipts, on the other hand, constitutes what is commonly known as the budget deficit.  A huge part of the deficit is what makes up the national debt.  This is due to the fact that the government actually spends more money than it has available, or than it can acquire through such channels like taxation (BPP 2009).  Government deficit or rather government debt can be classified into various categories depending on multiple considerations.

If the debt is classified depending on who is owed, it can be categorized into the debt owed to lenders from within the same country; hence, it is called internal debt.  The debt owed to those lenders from outside would then be called external debt.  The government has three ways that it uses to raise this kind of income and these are government bonds, treasury bills and securities.  These are traded for money and the holders of the items are treated as investors whose return on investment is interest upon the maturity of the bond, bill or security.  The ability of a government to borrow depends on its creditworthiness.  This is determined by the stability of the government.  If countries are not considered creditworthy, then they are compelled to borrow from supranational institutions such the World Bank and the International Monetary Fund.

There is a school of thought that feels that government’s liabilities and contingent liabilities form part of the national debt.  This is informed by a purely judgment-based prudence accounting that treats the government as a business entity.  The national debt can also be classified by duration.  The debt that is due for repayment in under one year is known as short term debt while the debt that is due for repayment between one year and ten years in known as medium term debt.  Finally, any debts that are owed for repayment in a period longer than ten years are commonly known as long-term debt and this comprises the bulk of the current national debt.

The United States federal government is charged with the enormous responsibility to provide services to their people as well as ensure that they meet a wide range of the demands and aspirations of the populace.  The government is structured to cater for these costs by levying taxes on the populace.  The taxes levied on these citizens are mostly sufficient to meet the demand for cash except in times of war when the government was compelled to incur huge borrowings to meet their expenses.  However, therein lays a problem because the taxes are also used to provide services to the people in the forms of police, firemen, and many other public services.  If these services cannot be provided by using taxes alone, then the country must go further into debt to continue to provide a high quality of life for its citizens.  Eventually, the practice of borrowing large amounts from external sources and deferring payments to meet the citizen’s needs and provide essential services has become commonplace in the United States.

There are two outcomes of the national debt.  First, taxes are raised to help finance the government debt and provide public services to the general populace.  This can often lead to a reduced availability of monetary resources for the general population because taxes are raised to cater for these finances.  The taxes further reduce the savings of these tax payers since their expendable income has faced a reduction.  As the government reduces the liquid cash for physical assets, there exists a consequential decrease of cash in circulation (Diamond 1965).

How the situation has unfolded

There was a very huge leap in the national debt during the tenure of President George W. Bush.  Upon his ascendance into office, the United States had a surplus in their annual budget.  When he took office the national debt stood at roughly $5.7 trillion.  By the time President Bush’s tenure was over, the country had a national debt of up to $12 trillion and reeling in an annual budget deficit of up to $2 trillion (Quinn 2009).  Many analysts have attributed this to two waged wars that have been waged at the cost of close to one trillion dollars and have been fully financed through national debt.

This situation paints a very grim picture for the financial situation of this nation.  It gives a look of instability for the federal reserves as well as creating a situation where the economy could be fairly judged to be teetering on the brink of collapse.  This is also what has many economists and financial strategists worried for the imminent future facing this country as well as the poor economic status that currently exists and shows few signs of improvement.  Many feel that this situation has not just dawned on the people like a bad morning; but, rather, it is the culmination of several poor decisions and unnecessary events caused by the political elite that have control over the affairs of the country.

To this end there has been and incessant clamor for a more workable and more reasonable strategy to combat the ever-growing national debt as well as countering the repetitive budget deficits that face the country each year.  Furthermore, there exists the problem of attempting to provide a good platform for economic recovery.  This was precipitated by the fact that upon the maturity of the first treasury bills, the government issued new bills to refinance them leading to the piling up of this national debt over time, which has culminated into the current financial situation witnessed in the country (Cavanaugh 2006).  According to Cavanaugh, the situation may not be as bleak as it is painted to be by most of the analysts and critics of the system.  The fact that the United States has the strongest economy in the world and still continues to exist and operate as a world superpower is a major point that helps justify this fact.

Many pundits have argued over time that the federal debt has not only weakened the federal reserve, but it has also created a bad situation for the youth where their future seems to have been mortgaged to finance the excesses of the current regime as well as finance the exploits of the current generation (Cavanaugh 2006).  Among the many effects that have culminated from the increase in the national debt are the increases in unemployment and in the cost of living, which stems from the increase in taxes that are required to finance these costs.

Efforts must be made to help stem the seeming overflow of this pattern of excessive expenditures; however, there is very little possibility that a perfectly balanced budget can be developed.  This is due to the fact that most of the budgets that are made face deficits as well as surpluses.  To fill the loopholes left by these deficits, the government enters into a borrowing agreement and this causes the national debt to increase as it is right now.  The major purpose of a national debt management policy is to prepare a good policy statement for how the national debt is to be controlled so that it does not continue this ever-increasing downward spiral.

Influences

The national debt policy is subject to influence from many sources and most specifically the many social pressure groups.  First of all, politicians will always prefer and demand that money is available for public expenditure to meet the needs of the people.  These politicians’ arguments point to the fact that if when a state owes its own people and the money is used to run the public programs within the state, then these costs do not qualify as national debt.  The other point that is used to defend the borrowing of money from the country’s citizenry is the argument that the money that is borrowed from the public to finance public expenditures is legitimate in that it is used to run programs that these people need for their survival (Sachs 1989).  In other words, if the people require these expenditures, then it is the right of the government to demand that the citizens help finance them through borrowed monetary resources.  Furthermore, politicians argue that these borrowed funds do not constitute as parts of the deficit or national debt because they are required by the people.

The contribution of these politicians serves to thwart efforts that might be made to instill fiscal discipline.  Too much national debt might leave the country quite exposed and vulnerable to national crisis as well as financial problems in times of shortages.  This also creates fertile ground for economic hardships and credit crunches occasioned by the loss of purchasing power of the general populace.  The arguments of these politicians have negative impacts on the continued growth of the national debt and annual budgetary deficits, which consequently, revert back to negative impact on the citizens of this country.

The other group that has influence on the crafting of a national debt policy is economists.  These economists are the experts who have the experience with hands-on effects of financial debt in the country.  It is only by putting their ideas into consideration that a good policy can be put into place.  The major effects that this technique is bound to have is that, based on their previous analyses, we can easily determine the best areas to address the national debt policy as well as determine what areas deserve greater emphasis to reduced the national debt.  The factors that lead to the national debt policy working all revolve around the ability to give due consideration to all of the varying economic factors and budgetary requirements of every functional state department as well as the various developmental projects that are being carried out by the government.

Another major influencing factor for national debt policymaking is the international economic situation.  Most of the countries are currently engaged in negotiations to form customs unions to increase trades that cross multiple international borders.  This is quite a challenge to countries that are aiming at using high customs levies as a way of raising federal revenue or financing national expenditure.  This is because the customs unions are going to make it very unfavorable for countries outside their trading blocks to trade with them, which results in effectively weakening their tax revenue raised from customs and excise duties.  To make up for this loss, the most viable alternative is to pursue other forms of taxes that will not inhibit cross-border trade but at the same time leave the government with sufficient revenue to fund its activities.

Finally, the last factor that greatly influences the eventual direction that the policy is likely to take is the actual national debt that current exists in this country.  Much as the current debt is a definite liability, the strategy that is adopted going forward should be consistent with the overriding desire to reduce the size of money owed to the lenders.  This will partially be achieved by ensuring that the growth in GDP is more than the growth in the national debt, and also ensuring that the debt that matures is financed more from the existing revenue reserves as opposed to financing it from additional borrowings.  In this way, the policy will focus on reducing the size of the national debt by large percentages as the years advance, and it will work to eliminate the repeated dependency on debt to finance government operations and expenditures.

The Strategy

The chief interest of all fiscal policies is to ensure that they spur economic growth as well as provide employment for all of the unemployed (Shefrin 2003).  This implies that the policy should address the existing social and economic problems and set out to gradually eliminate them while at the same time strengthening the current status of the economy.  The government must take a proactive stance on the national debt and make combating the national debt by first reducing the budget deficits and reducing the existing national debt a key priority.  This policy is, therefore, geared towards giving a good direction that is to be followed in as far as eliminating or managing the national debt.  The target goal is to ensure that the state has a sustainable debt level where the size of the national debt does not grow faster than the gross domestic product (GDP).  This will ensure that the debt reduces by a significant proportion if it is viewed against the national growth since with every subsequent growth in the economy, the debt will keep reducing.

Policy Focus

This policy aims at ensuring that the fiscal management of the state is performed in a sound manner and helps tackle the basic problems that are created by increased national debt.  The first issue that is to be addressed by the policy is the issue of crowding out.  This issue exists whenever the government consumes private sector investments and the finances in the market actually end up raising the credit rates and borrowing interest rates for the markets.  This becomes a major impediment for private investors doing business in the market as well as within the banking sector.  As the government takes up the circulating capital, it reduces the money in the market which effectively reduces the saving power of the population (BPP 2008).

Secondly, the policy aims at reducing the percentage of external financing that is used to perform the operations of national affairs.  This is done by increasing the amount of funds sourced from within the country to avoid external borrowing which is likely to have a negative impact on the efforts being made to recover from debt.  The third factor in the management of the national debt is the issue of monetary policy coordination.  A body fully charged with the responsibility to plan control and coordinate the operations of the treasury and its decisions on fiscal policy will be created.  This body will also maintain vital statistics on the progress of the recovery from national debt.

Another key aspect of the debt policy is opening the trade of domestic products to external, international markets that will be made possible through the use of the global free market to enhance the cross border trade.  This tactic will also create greater tax opportunities for the government and provide more funding to help reduce the national debt.  The government will look at the opportunities to raise revenue through taxation.  Furthermore, globalization will serve a good purpose for this policy because it has myriad advantages for the economy.  The process is driven by technological, economic, biological, sociocultural and political factors (Bhagwati, 2004).  Globalization has both positive and negative impacts on the country.  Global manufacturing and trade generates substantial benefits as it captures economies of scale.  However, there still exist multiple sources of costs for this factor.  Economic theories, such as the theory of economic advantage, have been used to support globalization because it is believed that the free movement of economic resources can help spur economic growth.  Similarly, Laissez faire capitalists argue that the global economies can only operate as one economy that has a unified operation and by doing so, will bring great benefits.  We will look at the likely benefits of globalization and how they can help inevitably manage the national debt.

Environmental pollution – In addition to the benefits of getting cheap goods, United States citizens also benefit significantly from decreased environmental pollution.  This is because with globalization, it provides fewer manufacturing industries, which causes the economy to supplement local goods with imported ones.  A more substantial and varied group of producers and consumers will continue to capture benefits of globalization at the cost of a few citizens in some areas who bear the burden of health impacts resulting from transportation processes.  These negative impacts are yielded because importing goods means increased transportation, which consequently increases the release of carbon dioxide and noise pollution.  Transportation also works to increase the future energy prices in gas and fuel.  Through globalization, global environmental problems such as over-fishing in oceans, cross-boundary pollution, and climate changes are solved through discussions and political action.  The government will use this opportunity to ensure that the citizens’ standards of living are lifted and sustained by the availability of cheap products.  The government will therefore avoid the responsibility of providing social welfare to the people because their cost of living will be highly reduced by the cheaper products.  The issue of wastes will be addressed by levying heavy fines on any dumping activities and by ensuring that companies generating toxic wastes are taxed heavily.

Outsourcing and off shoring – Globalization has led to an increase in outsourcing as industries constantly exploit the benefit of cheap labor and raw materials.  Imported goods require more transportation, increasing carbon dioxide emissions and consequently, increase the future costs of energy.  The results of outsourcing are declared through the loss of domestic jobs to local citizens, while the industries benefit from reduced production costs due to the cheap raw materials and labor force abroad from countries such as from Asia and Latin America.  In addition, off shoring has also increased with globalization as industries relocate to areas where there is greater availability for cheap labor and raw materials.  Another impact is the development of tax havens where companies prefer to base their activities in these countries to enjoy reduced corporate tax rates and gain increased profits.  This implies that the companies incorporated in the United States will declare higher profits due to the off-shoring activities.  The government will, therefore, exploit this opportunity to raise more money through corporation taxes.

Trade and Integration – With globalization, the United States enjoy the promotion of free trade as tariffs are eliminated, and free trade is created with small tariffs or no tariffs at all are created.  With free trade local business subsidies are harmonized, reduced or completely removed.  There is also emergence of worldwide financial markets and companies and consumers have a free access to a broad range of products and capital.  As a result of integration, international justice movements and international criminal courts have been launched and sporting events like FIFA world cup and Olympic Games are held.  These help create perfect opportunities for federal authorities to attract external companies and promote foreign branding, which will help boost the economy.  This will increase the people’s purchasing power and eventually the opportunities to capitalize on the taxable revenue of these international companies.

Migration – Globalization has led to increased immigration in the United States.  In this case, the U.S. will take advantage of cheap labor and garner increased taxable income and revenues.  Immigration results into increased cross-cultural contacts and diffusion of cultures.  This is because of the rise in desire to adopt new technologies and practices, and the desire to use foreign products and ideas.  The increased income means an increased growth of the GDP, while the target of having a faster-growing GDP as opposed to the rate of growth for the national debt will be easily achieved.

Technology – Advancement of technology has been witnessed as trans-border data flow increases.  There has been development of global telecommunication infrastructure using technologies like submarine fiber optic cable, internet, communication satellites and wireless telephones.  This has created what has been often referred to as a global village.  Considering that the United States is a global technology giant, the opportunity to grow and expand into foreign markets is very large and can also decrease the national debt.

Transportation – Globalization results in reduced transportation costs due to the development of containerization used in ocean shipping.  With a decrease in transportation prices, the movement of people and goods into the United States has also increased.  This has led to the development of logistics companies and third party logistics providers that have focused efforts in transporting facilities and goods for these companies that have an international outlook (Amazon.com, 2009).  This will enable the government to easily acquire vital resources for carrying out national responsibilities at a cheaper price, which will help cut down on national spending.

Globalization fits into the national debt policy in multiple ways, but more notably can be seen through the process of rationalization.  First, the government will create a good business environment to encourage cross border trade and therefore create opportunities for growth and enable an environment for international and domestic businesses to blossom.  Through this achievement, more revenue will be available that the government will subject to tax and the GDP continue to grow at a faster rate than the national debt.  This will help counter the negative effects of the growing national debt and provide the opportunity for the government to slowly reduce the debt through payments to its lenders.

Policy Strategies

Managing Budget Deficits

The national budget deficits will be managed through ensuring that all fiscal plans that are laid down are done so with a clear forecast of government revenue in mind.  To achieve this, the fiscal planning arms of the government will have to ensure that the budgets that are decided upon are within the limits of the projected revenue.  The budgetary allocations will also have to be adhered to and therefore ensure that the various implementing bodies of the government do not overshoot the budget.  To ensure that the government does not suffer from poor planning, the main target will be healthcare policy.  The lack of a good healthcare policy has proven to be the greatest opponent and hindrance on national fiscal management.  To ensure that there is proper monitoring of the national expenditure the first focus will be a good national healthcare policy.

The rules of enrollment in government and private programs result in millions of Americans living without health care coverage, including children.  The U.S. Census Bureau estimates that 45.7 million Americans, which is about 15.3% of the total population, had no health insurance coverage at some point during 2007 (U.S Census Bureau, 2008).  This was mainly due to affordability constraints.  International comparison by the Commonwealth Fund showed that among adults surveyed in the U.S., 37% reported that they had foregone needed medical care in the previous year because of high costs.  These individuals avoided seeing a doctor when sick, skipped medications or avoided other recommended care because of increased costs for health care.  The rate was even higher for people with chronic conditions, where 42% of these individuals declared that they did not seek or use medical care because of increased costs.  The study reported that these rates were well above those found in the other six countries surveyed: Australia, Canada, Germany, the Netherlands, New Zealand, and the U.K. (Health Affairs, 17).  In this study, it was also found that 19% of U.S. adults surveyed reported serious problems paying medical bills, which is more than double the rate in the next highest country.

A ‘single payer’ is a health care system in which only one entity will be billed for all the medical expenses.  For example, a universal health care department funded by government would act as the single payer for the entire health care system.  In this system, the doctor, pharmacist or the private insurance company will bill only the universal health care agency instead of billing the patient directly.  In the private sector this service is accomplished through ‘cash flow companies.’  These entities ensure guaranteed payment and reduced paperwork are positive consequences of the single-payer system.  These benefits offered by the entities are, however, neutralized by the fees of employing the service of a cash flow company.  A government-run health care system will not charge such fees because they never work for profit.  This will help reduce the government’s expenditures on the current healthcare system; therefore, it will spare part of the cash for other national responsibilities as well as help reduce the national expenditures that can result to an increase in national debt.

The best way to ensure that there is discipline in government spending is to ensure that the systems of approving expenditure are streamlined and centralized to ensure that the limits are adhered.  Secondly, we will have a fully-functional internal audit function that will be charged with the responsibility of verifying the manner in which the state departments adhere to the set guidelines on national expenditures.  This factor will address any problems arising from the failure of the departments to adhere to their budgetary allocations.  If most of the departments stick to their budgetary allocations, then the budget deficits will be reduced and the need to borrow money to finance state deficits will be overcome.

The second strategy that will be used to beat the national debt will be the creating of a proper taxation regime that has a highly efficient revenue authority.  To this end the state needs a revenue authority that is fully functional and that is able to meet its targets in terms of revenue collection.  In this way, the revenue authority will need to be quite aggressive in the manner in which it seeks to obtain the taxes from the population.  These various taxes are administered through secondary agents, such as the employers and contractors like the employee tax or PAYE and the Withholding tax.  These taxes will be followed up closely and used to meet the budgetary expenses.  The authorities will, therefore, have to follow closely to ensure compliance to tax legislation.  Serious tax audits will be used to verify how well the different corporate bodies comply with the existing legislation.

The effective use of sin taxes will be a major part of the strategy.  With the increased earning capacity of the people, there will be more money to spend on indulgent activities.  The government will tap in on this growth and heavily tax the activities that many citizens enjoy spending on the most.  Significant revenue will be raised by charging exorbitant rates for the licensing of such institutions that deal with liquor, casinos as well as many other entertainment facilities.  Alcoholic beverages, cigarettes and cigars will be taxed at 50% because these are fast moving consumer products that are used every day in the country.  By taxing these products at such a high rate, the government will be able to raise enough revenue to supplement its earnings for the operations.

Finally, the other strategy that will be used to meet the financial needs for these provisions of important amenities to the society will be concession agreements.  These agreements will be entered into with the private investors who have the financial means to manage such large projects like the construction of ports and other facilities.  The government will enter into an agreement where they will share the proceeds of these facilities until the private investors reap returns on the investments they have channeled towards the facility.  By using these strategies, the government will avoid the use of national debt to finance its activities and will no longer contribute to an increase in the deficit and national debt.  The growth in GDP will also help offset the existing national debt and help create a favorable debt situation where the debt can slowly be paid to the lenders of this country.

References

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BPP Learning Media (2009). Management Accounting. London: BPP Publishers.

Cavenaugh, F. (1996). Truth about national debt. Boston: Harvard Business Press.

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Quinn, J. Exploding U.S. national debt. Retrieved on October 25, 2009, from Web site: http://marketoracle.co.uk/Article14397.html

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U.S. Census Bureau (2008). Income, poverty and health insurance coverage in the united states.