Long-term Federal government budget problems

Question: Explain why there are long-term Federal government budget problems.   Explain why the base-line forecast of the CBO is misleading. Include in your answer why solutions to the problem will necessarily involve a decision about which citizens will bear the burden of trying to balance the budget and how various general approaches can influence where the burden is likely to fall.

Answer:

There are few serious issues facing the government fiscal position at the moment. Fiscal deficits have risen to a very high level. The fiscal debt downgrade by S&P has further added to the woes. Another dimension of the problem comes from the rising health care costs- for public and private. The healthcare costs are expected to rise quite significantly after the implementation of healthcare reform act, as shown by various studies by consulting firms. If the revenues do not increase, then the fiscal deficit will become unsustainable in the next two decades. However, to increase the revenue taxes must be raised. If taxes are raised, then there are other issues like decreased aggregate demand and a lower savings ratio. This will increase the share of government in the economy and the industries and privates sector's role will decline. The need of the hour, therefore, is to find ways to control the healthcare cost. The government and the private sector must find some way to control it. Also, the role of government in the economy should be maintained at a level which is sustainable, from the growth and regulatory point of view.

If a tax increase takes place, it should be designed in way that people who have high wealth and income, should contribute more. The general observation, however, remains the same: people have to share the burden as they did reap the rewards in good times. Control of cost of healthcare is something which can be achieved through scale operations and transferring some cost to the employees. Again, this means an increased burden on the households. Whichever way is taken to tackle the issue, the households will have to bear the burden and government and private sector employers need to come out with optimal strategies for this transition in costs.

The CBO report forecasts the US economy to be growing at 2.6% in 2012 while the Goldman Sachs forecasts stand at 2.1%. Furthermore, the CBO predicts that the debt will increase by  $3.48 trillion over the next 10 years which will mean that the debt burden will fall to 61%. However, in an earlier forecast in January, it forecasted the debt to GDP ratio to be 76.7%.  These statements are highly fluctuating, and the forecasts are changing quite heavily in such a small duration of time, which makes the CBO forecasts to be misleading. 

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