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The Fiscal Facts of Life
Spending less is the only way we can get out of debt.


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Michael Tanner

Having completed yet another deficit-reduction agreement that somehow managed to increase the deficit, Congress and the Obama administration are now laying the groundwork for upcoming fights over the debt ceiling, the sequester, and the continuing resolution that will fund the government given continued refusal by Senate Democrats to pass a budget. 

But before sitting down to negotiate another deal that will kick the problem down the road, perhaps our legislators could use a refresher course on the fiscal facts of life. 

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Let’s start with the basics. This year, the federal government will spend at least $3.62 trillion, an increase of almost $92 billion from last year. Of that amount, we will borrow $941 billion, or 26 percent. Indeed, our deficit this year is almost equal to the entire federal budget in 1985. And, in reality, spending will likely be even higher, since almost every year sees additional “emergency” expenditures as well. Thus, when all is said and done, expect our deficit to actually end up exceeding $1 trillion for the fifth consecutive year. 

Our national debt, which can be thought of as the cumulative total of our annual levels of fiscal irresponsibility, reached $16.4 trillion this month. This already technically exceeds the debt ceiling that was agreed to less than a year and a half ago. It is worth noting that our debt at that time was just $14.3 trillion, meaning we have added $2.1 trillion to the debt since the last time we promised to cut spending as a trade-off for agreeing to more debt.

Our debt currently exceeds 102 percent of GDP, if one considers both debt held by the public and intragovernmental debt (such as the Medicare and Social Security Trust Funds), so we now owe more than the value of all goods and services produced in this country over the course of a year. It’s much as if your credit-card bills exceeded your entire pre-tax salary.

Worse, that likely understates the true size of our indebtedness. If one includes the full future unfunded liabilities of Social Security and Medicare, this country’s real indebtedness could run as high as $129 trillion (in current dollars). Even under the most optimistic scenarios, our real debt approaches $80 trillion. Measured as a percentage of GDP, our total debt exceeds the debt of Greece or Spain.

The debt burden means that economic growth will be lower in the future. For example, the International Monetary Fund looked at the relationship between federal debt levels and economic growth, concluding that from 1890 to 2000, countries with high debt levels consistently saw their economies grow at slower rates than those with low debt levels. Similarly, Carmen Reinhardt of the University of Maryland and Harvard’s Kenneth Rogoff conclude that countries with a debt ratio above 90 percent of GDP have median growth rates 1 percent lower than countries with a lower debt, and average growth rates nearly 4 percent lower. 

If economic growth stays as slow as it has been lately, but spending stays high, our debt-to-GDP ratio will get bigger, slowing economic growth further and creating a devilish sequence of cause and effect. 



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