According to a report released by the Congressional Budget Office, the federal deficit fell 32% during the first seven months of the government’s fiscal year, compared to the same period last year. The CBO attributes the drop to an increase in tax revenue, brought on mostly by the expiration of the payroll tax holiday, and other tax increases that went into effect in January as part of the fiscal cliff deal. Tax revenue also went up due to a falling unemployment rate.
Overall, tax revenue was up by 16%, compared to a drop in federal spending of only 1.9%. The total dollar amount of the federal deficit for the first seven months of the fiscal year was $489 billion, compared to well over $700 billion for the same period last year.
In 2009, during the height of the economic and financial crisis, the deficit was 10% of GDP. For fiscal year 2014, the CBO projects it to be around 5.3% of GDP, and by 2015, a mere 2.4% of GDP. These are the annual deficits, not the total amount of the national debt. The national debt sits at 76.3% of GDP today, and is projected to fall to 73.1% of GDP by 2018. That projection assumes no changes to current laws, including the sequester.
This bodes well for the near-term, provided spending comes further under control and economic growth continues to accelerate, giving us even more tax revenue as more people go back to work, get raises and promotions, and more. As the economy grows, the national debt as a percentage of GDP should continue to fall, which should, in turn, bolster the nation’s credit rating. However, for the long-term (end of the decade and beyond), we’re still in trouble due to a variety of factors, and neither our government nor our media seem to know how to actually look at the debt.
Focusing solely on the number of dollars in the national debt and the annual budget deficit, as conservatives seem to enjoy doing, forces the discussion away from truly effective ways to reduce the debt. Two of the major long-term factors we have facing us are the aging Boomer population and a tax policy that can’t keep up. Another is interest rates; presumably, as the economy improves, interest rates will go up.
According to a January 2012 article in the New York Times by economist Paul Krugman, the debt discussion is way off track. Washington and our media pundits tend to compare our country’s debt problems to a household that has over-borrowed, primarily on a mortgage, which ignores the above long-term issues, as well as some very big differences between each entity with debt itself.
The first is that while your average household must pay back its loans, governments don’t have that restriction. Krugman says that all a government has to do is ensure that its tax base grows faster than its debt. An economy growing faster than its debt helps, too. For instance, the vast majority of what we’ve borrowed since WWII has not been paid back, and will likely never be paid back. What household can get away with not paying back its mortgage? Even a refinance is just a new loan that pays off an old loan.
Furthermore, our foreign debt is only about one-third of our overall debt. The average household owes 100% of its debt to others, like banks, credit card companies, etc. Of overall debt of more than $16 trillion, China and Japan together own roughly 14% of it. If you look at all the major foreign holders of U.S. debt, that number comes out to roughly 33% as of July 2012.
The Medicare trust fund, the Social Security trust fund, state and local governments, and the Federal Reserve all hold another 31% of it. The average household does not owe nearly one-third of its debt to itself.
The last third is owned by banks, mutual funds, savings bond holders and other investors, pensions funds and mutual funds, and insurance companies.
A third difference between household debt and the U.S. debt is that for every dollar we owe a foreign holder, $.89 is owed to us, according to Krugman.
Our debt is by no means harmless, and does have to be addressed. But in order to come up with effective ways of combating the debt, the entire picture must be looked at, everything from to whom money is owed to the percentage of debt as GDP, to, yes, wasteful spending, our tax base, and our economy and jobs market.
|Rika Christensen is an experienced writer and loves debating politics. Engage with her and see more of her work by following her on Facebook and Twitter, and check out her blog, They Need To Go.|