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A budget deficit or gap is the total by which a sum falls short of a reference amount. In economics, it represents a shortfall in revenue, for instance government budget deficit. (Murphy, 2012). Deficits, for instance in government, can be categorized into two, namely: cyclical and structural. A cyclical deficit occurs when the rate of borrowing goes up in a cycle’s low point. During a business cycle’s lowest point, unemployment rates are high which means that expenditure is high and tax revenues are low. On the other hand, during a peak in the cycle tax, revenue increases because of the high employment rates, and social security spending can, therefore, decrease. A structural deficit is the kind that persists for the whole cycle usually because the prevailing tax levels are exceeded by general government spending. (Schick, 2000) There are several solutions to this problem, some of which will be elaborated below.
The first solution to this problem is an unallotment plan, such as the one used in Minnesota. This law allows the executive division to unilaterally decrease spending under enacted appropriations. This is aimed at preventing a state budget deficit, especially when revenues are less than anticipated. It is vital to understand that the unallotment power can only be used after the following occurs:
- if it has been determined that the expected revenues are less than anticipated.
- a budget has been enacted into law and the governor has endorsed the unallotment.
- advice must have been sought from the Legislative Advisory Commission by the commissioner. (Schick, 2000)
- the budget reserve has been exhausted.
This law gives the executive branch officials discretion in identifying which spending to reduce so as to avert a deficit. The areas exempted from this law include unemployment compensation and appropriations to the legislature and judiciary. (Schick, 2000) This law is advantageous since it allows the most affected institutions enough time to adjust for reduction in their budgets.
The next solution involves restructuring the department of long term care and healthcare services. These are the largest areas of spending and certain changes are necessary to reduce the budget gap. First, instead of giving healthcare payments, states should provide health insurance subsidies. This will cover a great number of uninsured citizens, since subsidy could be adjusted to income. In addition, replacing state assistance programs with a 10% tax credit that can be directed towards selected charities will save significant amounts of money. Child care assistance programs should be merged and home visiting programs should be eliminated to increase efficiency.
The third solution is to stimulate economic development. This can best be achieved by including corporate incentives, credits and subsidies so as to eliminate corporate warfare. (Hofstede, 2003) Next, eliminating the corporate tax over a short period of time should encourage the creation, relocation and expansion of businesses which will create the needed jobs. To further stimulate economic growth and development, boards and commissions should be merged or eliminated. This creates a friendlier business environment and limits unnecessary expenses.
The bottom line is that the state governments should set an example as they aim to reduce the budget gap by getting rid of state vehicles. Employees should be reimbursed mileage instead. This cuts down on expenses because state vehicles are expensive to maintain and fuel. The state governments should also allow localities to abandon expensive unfunded mandates. This will reduce expenditure and allow spending in areas that need it the most. If all these measures are employed, the budget gap will be greatly reduced.