4. Saving, Capital Formation and Financial Markets

Article Title: “U.S. Ran $80 Billion Budget Deficit in December”

(Retrieved: January 18, 2011)

Source: The Wall Street Journal | U.S, January 12, 2011 (Author: JEFF BATER &

JEFFERY SPARSHOTT)

Summary

The U.S. is currently in high level of debt and the recent report on budget deficit states

that the government is still spending more than it collected. The Treasury

Department's monthly statement on spending and revenue showed an $80 billion loss

in December 2010. The December deficit was as expected and smaller than the $91.41

billion deficit in December 2009. There is a $1.294 trillion deficit in national saving of

2010, but 2009 still has the record $1.416 trillion since the U.S. went through a deep

recession. Yet the recovery of economy is slow since high unemployment rate is still

high. Analysts assume 2011’s deficit might set an all-time record because of the recent

extension of income-tax cuts. President Obama's administration predicted a deficit of

$1.42 trillion in 2011. The tax cuts are another government tool designed to encourage

the economy, yet it was considered a push to bring down future deficits. There are

concerns about a growing national debt in regards to the entitlement programs such as

Social Security and Medicare, which make up a large piece of government spending.

In the first three months of 2011 financial year, which began on Oct 1, federal

spending totaled $902.62 billion, including $56.78 billion in interest payments on the

government's debt. Revenue was $531.80 billion, which are higher than the same

period last year as a stronger economy pulls in more taxes. But Insight Economics

analyst Steven Wood said that the budget deficit would widen since the reduction in

the payroll tax became effective in January 2011.

(256 words)

Analysis

The article stated that the budget deficit of the US for the month of December hit $80

billion. This means that the Government is spending more than it collects in taxes and

this will lead the public saving to negative. Public saving is closely linked to

Government’s decision about spending and taxing. Governments get their income by

taxing the people and the private sector. If the income, which is mainly tax, and the

spending is equal, we can say that the budget is in balance. If income, tax collection,

exceeds spending, there is a budget surplus and if spending exceeds income, tax

collection, there is a budget deficit. In this case, there is a budget deficit in the US

Government spending. Budget deficit can be calculated by G-T which is as stated in

above, the excess of spending over tax collection.

According to the article, the main reason for this budget deficit is because of the

recession, which started in the late 2008. Ever since that the time more and more

people lost their jobs and the demand for most of the goods fell. As unemployment is

related with tax, there was a reduction in income tax as most of the people lost their

jobs. As a result, the Government’s income, tax collection, is decreasing with the

increasing rate of unemployed.

In the mean time, the Government is spending a large sum of around $47 trillion on

Social Security and Medicare programs which made to the headline news not very

long ago. We can see that the Government is spending a vast amount of money for the

nation while they can collect fewer taxes and this lead to the deficit in the budget.

Whenever a Government runs a budget deficit, the public saving will reduce and so

does the national saving. As a result, an increase in the interest rate will occur and a

reduction in the private investment. So far, the president is preparing a deficit cutting

plan and expecting to submit to the congress along with the next targeted budget.

In conclusion, the US is having the worst downturn and budget deficit ever in history

and the analysts are worried that when economic fiscal 2011 end in September, the

deficit for the year might be the biggest ever and the Government would reach its debt

limit of over $14 trillion.

(392 words)