What is the budget deficit?

By Levi Anthony - Posted 4/25/2011

How should we close the deficit?

1. Borrow to fill the gap. The problem with this is that borrowing will increase the national debt which is already gigantic and growing. And the debt has to be repaid. The government usually borrows this money from individuals, private businesses and foreign governments.

Sometimes, the government borrows from itself. How is this possible, you ask? Well, the government borrows from all that money you and I pay into Medicare and Social Security. This money is invested in trust funds and when they run surpluses the government borrows the extra.

2. Cut spending - the government can cut back on some of the programs it provides. Problem here is that vital public services might be eliminated or drastically reduce. Besides, many economists argue we should not cut the deficit in a time of recession as this will drain money away from the economy at a time when it needs it.

3.Raise taxes - the government can raise taxes to get the additional income it needs to close the deficit. What’s the problem with this approach? – No one likes to pay more taxes.

Because each of these options have serious consequences, a government should not rely exclusively on only one approach to close a budget deficit; the best approach is a combination of the three. So you have some borrowing, some spending cuts, and some tax increases.

Republicans and conservatives say the main cause of the deficit is that the government is spending too much money. Hence, the solution is simple – cut spending.

Democrats agree that some spending cuts are needed but also many of them want to increase taxes on the rich as well. They believe that the Republican plan to close the deficit through spending cuts alone will fall too heavily on the middle class and working people. The wealthy should contribute to closing the deficit by paying more taxes.
At the same time, Republicans and some Democrats are dead set against raising taxes on corporations and the wealthy. They believe this is counter-productive and will only hurt the economy.

Next - How do we close the busget deficit?  

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