In the two weeks since a faction of our government shut the government down and began threatening to cause the country to default, the conversation has changed.
First, the Republicans’ demand was that the Affordable Care Act, a.k.a. Obamacare, be “defunded” or delayed.
Now, the Republican demand is that the government cut spending to rein in the country’s debt and deficit.
The debt and deficit has not been a topic of national conversation for a while — in part because our deficit has actually been shrinking fast — so this is a good time to review where things stand.
Here are the facts (See charts below):
- The United States has indeed incurred a significant debt load over the last decade — $US17 trillion in total, of which about $US6 trillion is owed to the government itself.
- This absolute amount of debt is much less meaningful than the debt as a percentage of GDP, which is now about 73% (after netting out the amount that the government owes to itself. Including the intra-government debt, it’s just north of 100% of GDP).
- That’s the highest level of debt the country has carried since just after World War 2, but it is not an unsustainable level of debt. The country’s lenders are not panicking and demanding higher interest rates, and the hypothesized “point of no return” of ~90% of GDP that was talked about frequently a few years ago has been shown to have been the product of a calculation error. More debt is not good, necessarily, but it’s also not devastating.
- The country’s deficit — the amount we’re adding to the debt every year — has dropped sharply and is expected to be only 4% of GDP this year. That’s down from a peak of almost 10% a few years ago.
- Contrary to popular perception, our deficit is expected to continue to shrink for the next couple of years, until it reaches only 2% of GDP in 2015.
- This shrinking deficit, combined with the growth of the economy, will reduce our debt to GDP ratio over the next few years. Our debt-to-GDP is expected to fall to 68% by 2016.
- After 2016, the projected growth of healthcare, Social Security, and other social-program spending will begin to expand the deficit and debt-to-GDP ratio again.
- Over the following several decades, under current law, the projected growth of these social programs will balloon the deficit and debt-to-GDP ratio — to the point where our debt really will become unsustainable.
In other words, contrary to what you may be hearing from your favourite politician on TV…
* We do NOT have a near-term debt or deficit problem. Our current debt load is sustainable, and the deficit and debt-as-a-per cent-of-GDP are expected to shrink in the next few years. In other words, we do not need to cut near-term spending, no matter how strenuously people tell you we do.
* We DO have a long-term debt and deficit problem. We do have to reduce the expected deficits from Medicare, Medicaid, Social Security, and other spending from 2016 onward, either by reducing the spending of these programs or raising revenue to pay for them (or a combination of both.)
So, at some point, our government will have to come together to figure out an intelligent long-term plan to deal with our long-term problem. This plan does NOT, however, need to cut spending or increase revenue immediately.
Let’s go to the charts…
CHART 1: First, here’s our debt-to-GDP ratio in context. As you can see, we currently have a high debt-to-GDP ratio, but not an unprecedented one. We had a higher one after World War 2, and that worked out fine.
CHART 2: And now here’s our annual deficit as a per cent of GDP. As you can see, it ballooned during the Bush years and financial crisis, but it is now shrinking again. This year, the deficit is expected to shrink all the way to 4% of GDP, the lowest since 2004.
CHART 3: Here’s the deficit presented as the gap between revenue and expenses. As you can see, the deficit has narrowed considerably, and it is expected to continue to shrink for the next few years. Then, if nothing is done, it will start to grow again.
CHART 4: And here’s a debt projection. Debt as a percentage of GDP is about to peak, and then it should shrink for several years. After 2016, if we don’t have a long-term plan, it will start to grow again.
CHART 5: This chart shows the components of projected spending. It makes clear that the future budget busters will be our healthcare and social programs. Other spending is expected to shrink as a percentage of GDP, which may actually hurt the country.
CHART 6: Lastly, here’s the long-term view. If we don’t develop a long-term plan to either cut healthcare spending or raise revenue (or a combination), our debt really will become unsustainable. So we do have a long-term debt and deficit problem. But we don’t have a short-term one.
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