Budget Deficit and US National Debt

Budget Deficit and US National Debt

Introduction

America's long-term national debt now exceeds $14 trillion, a figure that is almost impossible for most people to wrap their minds around. In relative terms, that is roughly equivalent to the nation's entire economic output last year. And the challenge we face in preventing the debt from becoming an overwhelming burden on our children and grandchildren hearkens back to the founding era, when the fledgling republic was teetering on the edge of bankruptcy (Tisdale, 2011).

Alexander Hamilton, the first secretary of the treasury, proclaimed, "A national debt, if it is not excessive, will be to us a national blessing." He was right. We survived and prospered as a young nation because of Hamilton's efforts to consolidate and guarantee the enormous national debt incurred during the Revolution. During the Civil War, we used the national debt to save the Union. During the Great Depression, we used it to save the American economy. During World War II, we used it to save the world.

Discussion

In recent decades, however, the national debt has skyrocketed. We crossed the $1 trillion threshold under President Ronald Reagan (and reached $3 trillion by the time he left office), then surpassed $4 trillion under George H. W Bush, $5 trillion under Bill Clinton, $10 trillion under George W. Bush, and $14.3 trillion so far under Barack Obama. Meanwhile, since 1980 the debt has increased from 34.5 percent of gross domestic product, a measure of the total goods and services produced nationwide, to 97.9 percent. On the pages that follow, we chronicle how the national debt has evolved from a strategic tool for advancing the interests of the nation into a monstrous threat to our economic and political stability (Standard & Poor's, 2011).

Budget Deficit and Its Relation to the Debt

A national government budget deficit occurs when expenditure exceeds tax and fee revenue in a single fiscal year. In this case, the government must borrow to make up the difference. Therefore, a deficit causes the Gross Debt to increase. For example, U.S. federal government expenditures exceeded its revenues by $363 billion in 2007. Thus, the Gross Debt increased from about $8.5 trillion at the end of 2006 to about $8.9 trillion at the end of 2007.

The official deficit reported by the U.S. Treasury in 2007 was $162 billion. Note that this is less than the $363 billion figure just cited. The smaller figure results from the fact that the official deficit includes the “surplus” in the Social Security program. The government spends Social Security surpluses each year. Because the surpluses are spent, when Social Security receipts eventually fall short of benefits paid (around 2017), the difference must be made up by public bond sales, or by increased taxes, or by decreased spending. Public finance economists argue, therefore, that a more accurate accounting of growth in the debt would exclude Social Security surpluses from the deficit. In this case, the $363 billion figure is a more precise measure of the increase in the debt ...