Rising budget deficits and national debt are gaining the public's attention once again. That makes this a good time for a refresher on the basics about the federal budget and the national debt. To proceed, click on an icon or scroll down.
All the millions and billions and trillions thrown around in discussions about the nation’s finances can bring back dark memories of algebra class. But at the heart of the head-spinning numbers are two basic concepts: spending more than you take in creates deficits and producing deficits year after year results in a growing national debt. That’s the situation the U.S. faces.
Quantifying the problem requires measuring it effectively. The most common metric is to use the debt held by the public (which excludes what the federal government owes itself) as a percentage of the country’s economy. This gives a good idea of how manageable a nation’s debt is. U.S. debt held by the public is currently 77 percent of the economy and growing.
Solving the equation involves making the right calculations. Unfortunately, the math from policymakers has been off. First, things have moved in the wrong direction as Congress added trillions to the debt above the expected increase over the next decade. In addition, most of the spending cuts enacted to date have come from a small fraction of the federal budget known as discretionary spending. Hardly any savings have come from the biggest parts of the budget that will drive most of the growth in the debt going forward, known as mandatory spending. This spending, which includes Social Security, Medicare, and Medicaid, is essentially on autopilot since it does not require annual approval by Congress.
History provides a useful guide as to how we should manage the national debt. Debt has been with the U.S. since the very beginning, with the exception of a brief period under President Andrew Jackson when the national debt was completely paid off. However, our current level of debt of nearly 77 percent of the economy is higher than at any time except for World War II and its immediate aftermath. As a point of comparison, the historical debt average over the past 50 years has been 41 percent of the economy.
Unless we change course, we will eclipse the all-time debt high at about the same time a student beginning pre-school now will graduate from high school, and perhaps sooner. Debt is forecast to near the size of the economy by 2028, but that could be optimistic because it assumes policymakers won’t make things worse in the meantime.
Founding Fathers like George Washington, Thomas Jefferson, and Alexander Hamilton warned against excessive levels of debt. Debt has almost always been with us, but vigilance against extreme debt has been a constant as well. We cannot afford to forget that lesson.
Many students question the usefulness of “Home Ec” until they are living on their own. Likewise, the significance of the national debt is not immediately apparent. However, large and growing U.S. debt will have a definite impact on families.
The non-partisan Congressional Budget Office predicts that average income will grow more slowly if national debt continues to rise. The average American could stand to lose $55,000 over a 30-year career under this scenario compared to if the debt were on a declining path. Moreover, higher interest rates caused by rising debt will make home, auto, and credit card loans more expensive. For example, a family with a $300,000 mortgage can expect to pay at least $45,000 more over the course of the mortgage.
In addition, Social Security and Medicare face serious financial problems that will affect all those who rely on these vital programs. The trustees who oversee Social Security predict that its trust fund will run out by 2034. At that point, all recipients will see a 23 percent benefit cut. Medicare’s Hospital Insurance trust fund, which finances Medicare Part A, is due to become insolvent in 2029. These facts drive the point home that the country’s fiscal problems will affect all of us.
Budgeting is one of the fundamental tasks of governing. The federal budget is supposed to be a statement of national priorities and a blueprint for how those priorities will be financed. Sadly, too many policymakers seem to have dozed off during civics class and now the process has broken down. Budgets are rarely agreed to on time, if at all, and most government spending is now essentially on autopilot, with little oversight. In fact, Congress has not passed a budget by the April 15 statutory deadline since 2003.
A major contributor to the dysfunction of the process has been the lack of civility and cooperation among lawmakers. Washington has often flirted with government shutdowns in recent years because the two parties fail to compromise and work together. An actual shutdown did occur in 2018 because the two parties could not agree on how to fund the government before the new fiscal year started on October 1.
In addition to funding the government, Washington faces a never-ending stream of deadlines, such as reaching the statutory debt limit, because our leaders refuse to compromise and address our underlying budget problems. The constant crises and deadlock contribute to the low approval and lack of confidence that voters have in our political institutions.
Making the Grade
Policymakers have a lot of work to do if they want to graduate to a fiscally sustainable future. It’s time to hit the books and fix the debt.