The state of the American economy is getting closer to full employment, whereas the unemployment rates (as of 2017) remain to be approximately 4.4%. The current unemployment rates are one of the lowest if compared to other unemployment rates of the 2000s. They do not seem to be growing; therefore, deficit spending that is usually more advisable during the growing unemployment periods would be unnecessary right now.
Since the wage growth is also present (although its speed is relatively low), and the inflation rate is low as well (the current target is 2.0%), it is advisable to address the budget deficit by raising taxes and reducing spending. If government expenditures are reduced, there is a high chance that the reduction will result in decreased borrowing as well. To ensure that reduced government spending does not affect social programs, defense, and other programs related to social welfare, the government can also view tax increases as an option. It should be noted, however, that tax increases, although an effective method of reducing the budget deficit, can also negatively influence new business ventures that will face a lower return on investment. Therefore, tax increases have to be combined with reduced spending to ensure that the budget deficit is not reduced only by using taxpayers’ money. It is inadvisable to rely on increased spending because the desire to reduce the impact of increased taxes on citizens and businesses by increased spending will only reinforce the latter. It should also be noted that a tax increase is rarely effective in the long run, and, therefore, it should be backed up by the reduction of budget spending. The scale of the deficit should also be taken into consideration to evaluate how tax increases and reduced spending will influence it.