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What You Should Know about America’s Deficit and Its Debt

Home > The Federal Government and Debt > What You Should Know about America’s Deficit and Its Debt

Over the next several weeks, there is going to be a lot of chatter about the debt, as the fight to raise or not to raise the debt ceiling will reverberate in the halls of Congress. Another “D” word that will bandied about unmercifully by those in the thick of battle is deficit.

Anyone perusing a newspaper, surfing the Internet, listening to talk radio or watching the nightly news will read or hear these two “D” words incessantly. You will not be able to escape them.

Not understanding what these terms mean and how they affect the country’s overall economic condition puts anyone who hopes to separate fact from fiction – and reason from opinion – at a distinct disadvantage.

Here, then, are the ABCs about the Ds – a short primer about deficit and debt – for both personal and professional enlightenment.

What’s the Difference Between Deficit and Debt?

Every year, Congress passes a budget outlining the expenses the government is liable for – costs of the country’s federal programs and services. And each year, mostly around April 15, the government collects revenue from taxes.

If expenses outweigh revenues in any given year, a “deficit” is created. For 2012, the deficit was about $1.2 trillion.

That means the country is in the red for that amount. We are obligated to spend more money for last year’s costs than we have in the treasury. So to pay our bills and prevent going into default, the government must borrow enough to make up for the shortfall.

The national “debt” is the sum total of all our yearly national deficits.

For all those who decry such national accounting – after all, we’re hardly permitted to carry on this way with our personal finances, are we? – fear not. America has carried a national debt for almost its entire existence. Even when there is no deficit for a particular year – in years when the economy is booming, we often have budget surpluses – there is still an accumulated debt on the books.

Today the national debt is $16.4 trillion. We owe that amount to all those from whom we have borrowed over the years, allowing us to pay our bills and obligations in a timely manner.

To Whom Does the U.S. Owe Money?

From whom have we borrowed money to pay our yearly bills? Around a third of the debt, some $5.6 trillion, is owed to the country’s large institutional investors. That is:

  • the Federal Reserve
  • mutual and pension funds
  • insurance companies
  • banks
  • state and local governments
  • and anyone else who holds U.S. Treasury bonds, bills or notes.

These investors have loaned us the money and in return, we have promised to pay them back with interest.

Another third, about $5.5 trillion, is owed to foreign governments. These countries, like our domestic investors, loaned us money in return for our promise to pay them back according to the binding agreements we made with them. China and Japan are the largest holders of American debt – we owe each more than $1 trillion.

The final third, around $5 trillion, we actually owed to ourselves. It’s money that the treasury has borrowed from various government trust funds – Social Security, Medicare, retirement and pension funds, highway and airport accounts, unemployment and deposit insurance, etc. – that have surpluses and are not part of the general revenue stream.

How Our National Debt Got So High

So how did the nation’s $16.4 trillion debt get to where it is today?  Rather than going all the way back to the late 1700s, when we had to borrow money to wage the War of Independence, and which began our ongoing relationship with a national debt, let’s just begin with the current century.

Because of a number of factors, we added two-thirds of our debt over the past 12 years. In fact, throughout the 1990s, debt growth was almost zero, because there were no annual deficits created.

This stemmed from a booming economy, no expensive wars, and the fact that income tax rates had been raised substantially by President Bill Clinton and Congress, from where they were during the two previous administrations. During the final year Clinton was in office, there was a budget surplus of $86 billion.

In 2001, Clinton handed new President George W. Bush a national debt of $5.6 trillion. That year and again in 2003, Congress passed what is now known as the Bush era tax cuts, causing a steep decline in the amount the treasury would take in each succeeding tax season.

In 2000, total federal tax receipts were 20.9 percent of the Gross Domestic Product (GDP); individual income taxes were 10.3 percent of GDP, their highest level ever. By 2004, though, federal tax receipts had fallen to 16.3 percent of GDP, and individual income taxes dropped to 7 percent of GDP, their lowest level in 60 years. The result was a net decline in federal tax revenues of 4.6 percent in just the first four years of the decade. Over the last ten years, the Bush tax cuts have cost nearly $1.3 trillion.

As tax revenues continued to fall short of expenditures, a deficit was created each year of the Bush presidency, thus adding to the national debt. Then the country borrowed even more money – nearly $4 trillion – to pay for the wars in Iraq and Afghanistan, further pushing the debt upward. By Bush’s last year in office, there was a $642 billion deficit, and the debt had almost doubled to $9.98 trillion.

During President Barack Obama’s first term, the debt increased another 50 percent to its current $16.4 trillion level. This largely was due to the meltdown of the economy during the Great Recession, which further reduced the government’s ability to reap the necessary tax revenues to stay in the black.

At the same time, the various stimulus policies Obama and Congress enacted to prevent a total U.S. and global economic collapse were paid for with more borrowed cash, while spending on government programs, particularly healthcare and defense, continued to increase without enough income to pay for them.

How Do We Tackle the Debt Ceiling?

While the deficit for the years 2010 and 2011 actually declined from 2008 and 2009 levels, it wasn’t enough to keep the overall debt from increasing. Moreover, this month, the debt ceiling expires.

The debt ceiling is the legal limit that the government is allowed to borrow and it is usually renewed and bumped up when necessary, without much debate or partisan bickering.

Today the difference between what the country owes and what the debt ceiling actually allows us to owe is about $38 billion. Raising the debt ceiling will permit us to borrow the extra money so that we can pay off debts that have already been incurred.

Failure to raise the debt ceiling would mean we couldn’t borrow any more funds and we would necessarily default on certain payments.

Nobody believes that that would be a good idea. But Congressional Republicans have already threatened to withhold raising the debt ceiling unless they, Obama and Congressional Democrats can agree on spending cuts in the upcoming yearly budget process.

What will happen over the next several weeks is anybody’s guess. But one thing is certain. More “D” words are coming: drama, distraction, deep division, and maybe even disaster.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].