Fiscal Deficit in USA has two causes

The fiscal deficit in USA has been caused by increased spending on one hand and reduced revenue on the other. The financial system has been for the time being fixed and saved from collapse. Attempts are now being made to divert the attention to bringing down the deficit and debt instead of taking steps to increase the revenue so as to able to pay off the debt.

The government has been on an expansive mood right from the 1980s. This move has been given by all shades of parties in power – right, left or centre. The Economist reported on 21st January, “Long before AIG [American International Group] and Northern Rock ended up in state custody, government had been growing rapidly. That was especially true in Britain and America, the two countries in which ‘the end of big government’ had been declared in the 1990s. George Bush pushed up spending more than any President since Lyndon Johnson. Britain’s initially frugal Labour government went on a splurge: the state’s share of GDP [gross domestic product] has risen from 37 per cent in 2000 to 48 per cent in 2008 to 52 per cent now".

"In swathes of northern Britain the state now accounts for a bigger share of the economy than it did in communist countries in the old eastern bloc. The change has been less dramatic in continental Europe, but in most of those countries the state already made up around half of the economy.” The trend is not likely to abate as the number of senior citizens increase and start drawing pensions.

Thus while there has been a hue and cry from all quarters against big government, the latter continued to expand. But in recent months there is a panic reflecting the urgent need to “exit” from the stimulus.

The financial entities are not able any more to leverage their risks as before and as such they have become cautious about lending. It is making borrowing difficult but past commitments have to be met and new expenses financed. For this extra resources have to be raised.

The incidents in Dubai have sent shock waves. Governments that borrow through many avenues may not always be able to provide the guarantee against default.

All these have led to increase of interest rates of those creditors who are willing to lend to governments drowning in debt. Amortization payments are making the problem worse.

The irony is that the need to raise additional revenue comes at a time when the government is hard pressed to spend for social support to the people.

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