Federal Debt and Deficit Reduction Plans Federal

Federal Debt and Deficit Reduction Plans

Federal debt is a public debt which represents the federal securities owned by individuals or institutions outside the United States government and United States Treasury securities that are administered by the United States government. The United States government has to take some action to reduce the Federal debt as it is rapidly increasing. The Federal debt is represented by the Treasury of United States.

The total outstanding public debt as on 6th May 2011 is $14.32 trillion which is approximately 98% of the GDP (Gross Domestic Product) of $14.66 trillion. The rising level of federal debt may cause the fiscal crisis in the United States. Investors may not finance government if they are not compensated with very high interest rates for their money. Thus, interest rates will also rise with the debt. This problem can be solved only if the economy recovers. This recovery improves the deficit situation as people earn well. But, even if the economy recovers, the federal spending is expected to increase than revenues so the government has to continue borrowing money to spend. The congressional Budget Office (CBO) states that if the same situation continues for long time the deficits will remain high throughout this decade and beyond and the debt might reach 90% of the GDP in 2020 (Huntley, 2011).

Forecasting the debt is a difficult process for number of reasons. While forecasting the debt we make lot of assumptions which may not happen as expected and that might cause changes in the real debt. As per the budget which is proposed by President Barack Obama in 2010 the debt was estimated to increase up to $20 trillion by 2015 and was estimated to increase 100% of the GDP by 2020 and remain same in the next years.

Barrack Obama has given many deficit reduction plans to reduce $4 trillion in the next 12 years, among them I would like to recommend the President for tax reforms and to collect the contribution by the healthcare to reduce the deficit.

1. Deficit can be reduced by Tax reforms

The present income tax system for individuals is fundamentally unfair, complicated and confusing. Most taxpayers need to do lot of computation to see if they are qualified for benefits and penalties. Many people lose lot of money for the sake of tax preparers. Some tax payers report less income to avoid taxes. The corporate income tax is hurting the America's ability to compete with other nationals. The statutory rates in the United States are more compared to other industrialized countries. The United States is one of the industrialized countries which have hybrid system that collects tax from the foreign source income. This system is a disadvantage for United States industries against their foreign competitors. The territorial tax system must be used to help the United States tax system to bring in line with other competing countries. The new Tax reform can be effective if it lowers the tax rates, simplify the American tax codes, reduce the gap between tax payments, reduce the deficit to make America the best place to offer opportunities to find jobs and start business. (The National commission on Fiscal Responsibility and reform, 2010).

2. Deficit can be reduced by reducing the cost of Healthcare

Tocknell (2011) states that Healthcare industry plays a major role in the deficit reduction. The health care costs are growing faster than the economy. The health care industry is expected to contribute its share by changing the Medicare and Medicaid programs which accounts $480 billion by 2023 and $1 trillion by 2033. In Medicare programs, savings must involve reduction in spending on prescription drugs, wasteful subsidies and erroneous payments. Today, Medicare beneficiaries are more confused with co pay, premiums and deductibles which do not offer the financial protection and spending predictability.