For nearly a century, we’ve had a good system for tracking how much the federal government spends and earns. Since the Budget and Accounting Act of 1921, the data of expenditures incurred and revenue raised have never been in doubt. However, there’s plenty of uncertainty when it comes to projections about our fiscal future and there’s no shortage of opinions on what to do about it.
To understand America’s fiscal situation, it’s important to lay out the facts.
The first and most basic thing to know is the difference between the deficit and the national debt. The deficit is the annual difference between what the government collects in taxes, fees, custom duties, and receipts and what it spends. Debt, on the other hand, is the cumulation of annual deficits from the founding of the nation offset by any years of surpluses. In the current year, the federal government collected $3.47 trillion in revenues and spent $4.47 trillion, resulting in an annual deficit for 2019 of $1 trillion. However, this deficit added to all previous deficits has resulted in federal gross debt exceeding $22.7 trillion.
Before going on August recess, Congress passed a law that will allow the government to continue to borrow money. This new authority will result in debt reaching nearly $25 trillion by the middle of 2021.
In the current year, the federal government collected $3.47 trillion in revenues and spent $4.47 trillion, resulting in an annual deficit for 2019 of $1 trillion.
These are huge numbers and difficult to absorb. To put the numbers into some perspective, budget analysts and economist compare them to the size of our national economy (GDP). Our GDP was most recently measured at $21.3 trillion. Viewed as a percentage of GDP, our annual deficit today is only about 4 percent.
Is this high or low?
Relative to the last 50 years when the annual deficit averaged less than 3 percent of GDP, one might conclude it is relatively low, and, therefore, not a problem. But persistent 3 or 4 percent deficits over time, and projected into the future, create a troubling gross debt burden.
The cumulated $22.7 trillion gross debt today is around the total size of our annual economy. But economists and budget experts prefer to exclude from the gross debt figure that portion of the debt already held in government accounts such as the Social Security Trust Fund. Removing that debt from the gross figure results in what is referred to as debt held by the public. Measured this way, public debt still totals nearly $17 trillion.
So, is this number something to be worried about? Yes. The $17 trillion of public debt is nearly 80 percent of America’s annual GDP, which is historically high. Only during World War II did debt held by the public exceed today’s levels. For the last 50 years, debt held by the public has averaged 42 percent. In a very short time period, since 2010, this debt metric has exploded – more than doubled to 80 percent. Left unaddressed, it is expected to reach over 90 percent in 10 years under even the most optimistic assumptions of economic growth.
An important point – this debt is not held only by the American public. During WWII, our debt was held by Americans, mainly in the form of war bonds. Today, over 40 percent of the debt is held by foreign investors. This is not necessarily a bad thing since it means foreign investors see value in purchasing our government debt. As former CBO Director Rudy Penner is fond of saying, “We are the best-looking horse in the glue factory.”
This deficit added to all previous deficits has resulted in federal gross debt exceeding $22.7 trillion.
However, it also means that more and more of the government’s interest payments are going overseas and not back into the pockets of American investors.
Speaking of interest payments, the federal government has been fortunate over the last few years that yields on 3-month Treasury bills and 10-year Treasury notes have been relatively low. But even with average interest rates on debt held by the public at 2.6 percent in 2019, just paying the interest on the cumulative debt means an annual expenditure of over $380 billion. And as more of the debt is owned by foreign borrowers, fewer of these interest payments are returned to domestic investors. Plus, should interest rates rise from their current levels—or revert to the mean as some would say—the fastest growing component of federal spending will not be Social Security or Medicare payments, but simply paying the interest on the public debt.
Which brings us back to deficits – the difference between what we take in and what we spend. It is basic math. The fact is, the annual deficits over recent years have been the result of too much spending unmatched by too few resources to pay for that spending. Going forward, just to stabilize the current debt at 80% of GDP over the next two decades would require increasing revenues by 11% or cutting spending by 10% starting tomorrow – a total of $400 billion.
Finding that savings is a challenge since 70% of the spending in the federal budget is on automatic pilot in the form of benefits promised by previous Congresses and presidents. These so-called entitlements, many tied to an aging demographic, portend continued increased spending into the future if left unchanged. So, only 30 percent is subject to the annual appropriation process.
Clearly, where there is wasteful spending, it should be eliminated. But, at the same time, the public increasingly demands more government spending to improve infrastructure, protect the borders, and boost our health and the environment.
To be sure, a growing economy can produce revenues to fund necessary public spending. However, a tax code that does not result in increased investment and growth but merely reduces taxes to spur current consumption will not address deficits or debt.
Economic growth alone simply cannot solve our fiscal problems. To erase the projected annual deficit of over $1.4 trillion in 2029, the economy would have to grow between 5 and 6 percent annually, more than double the current rate. That is not going to happen.
While there’s plenty of disagreement about how to solve our financial predicament, it’s imperative that our elected officials understand these basic facts about our economy. Tough choices will need to be made, but they should be made based on real data.
G. William Hoagland is a Bipartisan Policy Center senior vice president, helping to direct and manage fiscal, health, and economic policy analyses. He previously served as vice president of public policy for CIGNA Corporation, staff director at the Senate Budget Committee, and director of budget and appropriations in the office of former Senate Majority Leader Bill Frist.