Before I begin, let me first tell you what “primary budget deficit” means. Primary budget deficit is simply the net borrowing of the government. It is computed by getting the difference between the government’s spending and revenue.
Now, why is targeting the fiscal deficit important? A high level of deficit means that the government is borrowing and spending a lot. Borrowing and spending aren’t necessarily bad, but they could lead to too much inflation if left uncontrolled. Higher inflation leads to higher interest rates, which could stunt growth.
To make sure that this doesn’t happen, Obama has created the National Commission on Fiscal Responsibility and Reform. This commission is designed to recommend measures to bring the U.S. primary budget deficit back down to zero by 2015.
Here are the two major changes proposed by the commission to put a damper on the government’s debts that has stretched to 9.1% of the GDP:
- Increase taxes
Yeah, that’s right! The commission believes that increasing taxes and broadening the tax base, or rather, the assets that can be taxed, will help reduce the government’s deficit greatly.
Some of the suggestions include increasing gasoline taxes from 2013 to 2015, reducing income tax returns, and removing tax exemptions on health care benefits of employees. Uh-oh, will the U.S. economy need its own Robin Hood soon?
- Spending cuts
Another trick up the commission’s sleeve is a range of spending cuts. The major ones include the reduction of the usual increase in the COLA (cost-of-living adjustment) program, a decrease in the White House’s budget, a cutback on subsidies to farmers and student loans, and freezes on salaries and bonuses for federal workers. Talk about being stingy!
Spending cuts and higher taxes? Do those sound familiar to you? Why, those are the main ingredients of an austerity plan! And we all know how these belt-tightening measures could drain economic activity significantly.
It doesn’t help that the U.S. recovery, particularly in the labor market, is still unstable. I can just imagine how increased taxes could restrain spending, overall U.S. economic growth, and the U.S. dollar…
Too bad some market hotshotsare saying that the projected figures aren’t realistic. For instance, Reuters analyst Felix Salmon pointed out that it would be impossible to cut healthcare costs to just 1% of GDP in the near term.
Dean Baker, co-director of the Center for Economic and Policy Research, even insisted that the commission should fix the “broken healthcare system” first before thinking of cost-cutting.
Of course, naysayers are part and parcel of ambitious plans like these, and while there’s a little bit of political tension going on, the U.S. dollar could be under pressure. But if these deficit reduction measures do the trick and indeed stabilize the U.S. economy, the Greenback could make a huge comeback. Watch out for that, will ya?