The Effects of Budget Deficits

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Credit card use can easily lead to household deficit spending.
Credit card use can easily lead to household deficit spending. (Image: Jupiterimages/Polka Dot/Getty Images)

The decision to engage in deficit spending may be a fiscal decision, but it can also become a political one with a domino effect following it. Budget deficits are the result of consistent overspending at a time when it is fiscally irresponsible to do so.

Home Budget Deficits

Debt is the biggest contributor to bankruptcies and foreclosures. Unlimited spending without the income to back it up leads to a family debt crisis. Most frugal households appear immune to the resulting situation, where loss of employment is the biggest contributor to our current debt crisis.

In order to help Americans finding themselves in this seemingly inescapable situation, the federal government began to increase its budget deficit. Stimulus programs began to surface as “bailout” solutions. However, households are last to receive any influx of cash. Jobs must be available in the private sector before hiring can begin again.

Government Budget Deficits

The slogan "too big to fail" sheds light on entities that would be first to receive government nonexistent funds meant to stimulate the economy. Traditional expenses include national defense, foreign affairs, and the judiciary, legislative and executive branches. Some non-traditional expenses came from the period of the Great Depression and the Great Society.

Non-traditional expenses cover social and educational programs that are called “entitlement” programs. These include Social Security, Medicare/Medicaid, welfare, education grants and loans.

Great Recession

The president and Congress made the decision to spend unprecedented amounts of money, thus raising the budget deficit to a point that will take several generations to cure. Generous spending was the response to our current “Great Recession,” but the timing of this spending spree was not good. The United States is funding two combat missions overseas, which are proving quite costly.

These additional spending programs greatly exceed the annual tax revenue. The only way to pay for stimulus spending is to use short- and long-term bonds to borrow money. The bonds have backing of “the full faith and credit of the United States.” These same bonds previously had backing of gold and silver, but this is not true today.

Effects of Budget Deficits

Along with the inability to equalize income and expenses, there are other effects of budget deficits. Some effects include lower taxes, higher interest rates, lack of new jobs and shut down of private-sector business. Increase in borrowing spawns higher debt interest, which means government must either increase taxes or decrease spending. Increasing taxes may cause an economic dip.

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