Issue brief: Debt and Deficit

national debt, US deficit, debt, CAROUSEL

The Electoral Issue:

America's growing public debt makes the United States dependent on foreign countries like China, hurts the country's credit rating which reduces the value of bonds used to finance government operations, increases interest rates which makes private investment more expensive and burdens future generations who will be forced to take severe measures if the growth of debt is not slowed.

The Challenge:

To align revenues and expenditures, balancing the budget in a way that safeguards the fragile economic recovery and restructures government expenditures as equitably as possible.


Debt and Deficits Are Growing

The national debt is the accumulated total of annual budget deficits. Near the end of Bill Clinton's presidency, in December 2000, the national debt stood at $5.66 trillion. Since then, the debt has increased dramatically, with a particularly sharp increase seen after the beginning of last recession in 2007. In December 2008, near the end of George W. Bush's presidency, the debt stood at $10.7 trillion. Today, our national debt totals more than $16 trillion dollars.

In June of 2012, the CBO projected that by the end of 2012, the American government will owe more money than the entire economy will generate in a year. Countries whose publicly held debt surpasses 70 percent of their GDP are generally not considered a safe investment. Greece, currently ground zero of the global debt crisis, is saddled with public debt at approximately 160 percent of annual GDP.

In 2011, the federal government spent $3.6 trillion but collected only $2.3 trillion in taxes, leaving the remaining $1.3 trillion deficit to be financed with borrowed money. Figures released in July by the White House forecast a $1.2 trillion deficit for 2012, marking the fourth consecutive year that budget deficits have surpassed $1 trillion.

Mandatory Spending: the biggest slice of the pie is growing fastest

Mandatory spending is the hardest spending to change politically and it's growing fast. It includes entitlement programs (Social Security, Medicare, Medicaid, CHIP [Children's Health Insurance Program]), safety-net programs like food-stamps and unemployment insurance, and interest payments on the debt.

In 2011, Social Security expenditures totaled $731 billion, or 20 percent of the federal budget. Medicare, Medicaid, and CHIP expenditures totaled $769 billion, or 21 percent of the budget. Safety net expenditures totaled $466 billion, or 13 percent of the budget. And servicing the national debt cost $230 billion, or 6 percent of the budget. Together, these so-called mandatory outlays comprised about 60 percent of the federal budget.

In 2011, the CBO projected that mandatory spending alone would exceed all federal tax receipts, meaning that without deficit financing, we'd be unable to fund any other portions of the federal budget, from defense to education to infrastructure, and everything in between.

It gets worse. This mandatory spending is projected to rise dramatically in future years due to an aging population and the rapid rise in healthcare costs. More seniors will be drawing on Social Security and using increasingly expensive Medicare.

In 2010 we spent approximately 23 percent of our budget (excluding debt interest payments) on health care entitlements. By 2058, according to the Peter G. Peterson Foundation, that number is expected to grow to over 50 percent of the budget. According to the CBO, the three major entitlement programs - Social Security, Medicare, and Medicaid - amount to 10.4 GDP now, but that number would swell to 16.6 percent by 2037, leaving very little public money for everything else.

Defense Spending

American defense spending in 2011 totaled $718 billion, consuming 20 percent of the federal budget. The United States spends far more on defense spending than any other country. The 10 countries with the highest defense spending together spent $1.19 trillion on national defense; more than 58 percent of that money was spent by America. In second place is China, which spent $120 billion on national defense in 2011.

In the wake of 9/11, defense spending skyrocketed to new heights, roughly doubling in a decade over the course of two major wars. The defense budget in fiscal year 2000 was a comparatively small $295 billion dollars.

Non-Defense Discretionary Spending

This spending category includes basically everything else on which our government spends money - infrastructure, education, medical research, and federal employee expenditures, among others. This discretionary spending, so labeled because Congress must disburse the money on an annual basis in 13 appropriations bills, accounted for 19 percent of federal spending in 2011.

According to a report from Republicans on the House Budget committee, since 2008, discretionary spending, excluding defense and "stimulus" measures, has increased by 23.8 percent.

Democrats have pushed back on the narrative that non-defense discretionary spending has surged under Obama. Senate Appropriations Committee Chairman Daniel Inouye, D-Hawaii, released a statement explaining, "Although non-defense discretionary spending in nominal dollars has increased, when taking inflation and population growth into account the amount contained in the [2011 budget] represents no increase over what we spent in 2001, a year in which we generated a surplus of $128 billion. So the right question to ask is: Are we really spending too much on non-defense programs? The answer is clearly no."


Depending on who you ask, the budget deficit may not be a question of how much we spend, but how little revenue we take in. In the wake of the Bush tax cuts in 2001 and 2003, the overall federal tax burden fell to record lows: 2011 tax revenues as a percentage of GDP totaled 14.8 percent, the lowest level since 1950.

According to a 2012 report issued by the Congressional Budget Office, the average federal tax rate for all households was 17.4 percent, a record low for the 30 year window analyzed in the study. The effective corporate tax rate in fiscal year 2011 stood at 12.1 percent, the lowest level in at least 40 years.

Credit Rating

In August 2011, ratings agency Standard & Poors downgraded America's credit rating for the first time ever, lowering the rating on American government bonds from AAA (the highest rating) to AA+. In justifying the the downgrade, the agency blamed the growing debt burden and the decreased likelihood it would be addressed as Washington grows more partisan.

The credit downgrade, according to many analysts, will raise the cost of borrowing for the U.S. government, costing taxpayers billions of dollars annually. It could also have ripple effects on U.S. consumers, who will face higher interest rates on credit cards, mortgages, and business loans.

Recession & Slow Growth

Although a wide fiscal gap predated the recession, the decline in tax receipts during the economic downturn and the surge of federal spending designed to mitigate the downturn caused the already swollen deficit to explode, surging above a trillion dollars in 2008 and remaining there since. The increase was attributable primarily to the federal bank bailout, the 2009 stimulus package, and the automatic increase in food stamps and unemployment insurance that follows after a recession when more people are out of work. Fewer jobs means fewer taxpayers, which means fewer taxes. Tax receipts as a share of GDP sunk to 15 percent between 2009 and 2011, the lowest level since 1950.

Next page: The Solutions