The National Debt is the amount of money that the U.S. government has had to borrow over the years to pay for the functioning of the government and its programs. It is now money that is owed to others – foreign governments, individuals and corporations. Anyone who has bought “Treasury Bonds” or other instruments owns a piece of this debt, which includes the interest our government must pay on the debt.
The national debt is not the same as the “budget deficit,” which is just the planned “red ink” that is approved by Congress in the process of passing the ordinary expenditures of the federal government for a particular fiscal year. For example, this past year (2013) there has been much discussion about “sequestration” being a blunt tool with ill effects on those who are poor or needy. Sequestration (an across-the-board budget cut in 2013 of $85 billion on both defense and domestic appropriated programs -- with some exceptions --to affect all budgets from 2013 to 2021) was an attempt by some in Congress to reduce the budget deficit, not the National Debt.
The Faithful Budget , 2014 urged Congress to replace sequestration in a way consistent with the country’s shared values, using a balanced approach that applies justice and compassion. While noting the importance of making judicious cuts to defense, earmarks and other wasteful spending, the document urged that revenue be increased to serve the whole human community of our country. Congress was reminded that it had already enacted over $2 trillion in deficit reduction, over 70% of which had come from spending cuts affecting domestic discretionary programs (Faithful Budget, 2014, p. 23).
In the early 1990s, Congress enacted a law called “pay-as-you-go” that required legislators to pay for new spending either through other savings or new revenues. This law was in effect from 1993 through 2002, when the Republican Congress allowed it to expire.
During the Clinton years, the annual budget deficits were significantly reduced and in 1998 through 2001 there were actual budget surpluses that allowed some of the national debt to be paid off. These surpluses also gave rise to the 2001 tax cuts and Congress’s incentive to disregard the “pay-as-you-go” rules that were still on the books in 2001 and 2002.
After September 11, 2001, the U.S. entered into two wars, which the Bush Administration never considered part of the “ordinary expenditures” of the government. So they never included the cost of the wars in the federal budget, and these costs never showed up in projected budget deficits, but as “supplementals” outside the budget process. Nevertheless, these costs added to the national debt.
Complicating the debt problem are several other costs that rose as the decade proceeded. Healthcare costs dramatically increased during the first decade of this century at rates higher than the growth rate of the economy. Because of federal expenditures for Medicare and Medicaid, this growth rate had a large impact on the federal debt. Another aspect of the debt increase began with the recession in 2007. Actual federal revenues decreased at a time when the budget had predicted revenue increases. Stimulus bills that economists credit with saving our economy from the precipice of a full-blown depression added more debt. It should be noted that these expenditures actually generated some revenue for the government through increased employment. These same economists project that the stimulus bills will have little long-term impact on the debt because they were short-term payouts that generated economic growth and higher tax revenue. Finally, Social Security expenditures have increased dramatically as “baby boomers” have begun to reach retirement age. The pressure will only rise to pay these obligations as the revenues generated by the workforce decrease with the aging population.
As of September 2013, the U.S. national debt ceiling is $16.7 trillion and the Secretary of the Treasury said the U.S. will reach the limit of its borrowing authority in mid-October 2013, when the debt ceiling will have to be raised by Congress. The debate over the debt ceiling is likely to be fraught, as it has been since 2011.
The growing national debt has become a major problem for our country primarily because economic growth has slowed. Since World War II, our country has managed its debt by continuing to grow the economy at record rates. In an expanding economy, tax revenues increase, and this allows for investment in the future by responsible borrowing. As debt increases, the nation must make payments on the debt. As long as the U.S. can borrow money at low interest rates, these payments (called debt service) are not too onerous. As interest rates rise, the U.S. has to pay more money to service the existing debt. Another potential risk is that if purchasers of U.S. debt (e.g. China and Japan) begin to feel unsure about the capacity of the U.S. to repay our debt they will not purchase the debt at low interest rates. They will require a “risk premium” to protect against the possibility of default. This, too, will raise interest rates, and the cost of the debt service will increase. For this reason, if for no other, the U.S. has to be able to maintain its capacity to repay the debt and not raise international concern about the value of the dollar.
Currently, the U.S. is carrying debt that is approximately 75% of our Gross Domestic Product (GDP). The last time the debt was so high was at the end of World War II when we were still paying for the war, but at that time, nearly all the debt was held by people in the U.S. who bought "war bonds." In 2002 -- the last year there was a federal budget surplus -- the debt was 33.6% of GDP. There seems to be a growing consensus that the U.S. can afford to carry a maximum debt of about 60% of GDP. Why this amount? It is based on the interest. The target interest payment (called "debt service") is 2 to 3% of GDP. The dramatic difference between our actual federal debt and the consensus debt target illustrates how much work we have to do to get control of our rising debt.