7 Things to Know about the Budget Deficit
Editor’s Note: Below are seven facts you really should know about debt and the budget deficit. The list comes to us from Our Fiscal Security, where this piece first appeared.
1. The deficit is the gap between what the government spends and the revenues it collects each year. We didn’t always run deficits. When President Clinton left office, the federal budget was running a surplus of $236 billion, or about 2% of the U.S. economy. And that extra revenue was being used to pay down the national debt. To understand how we moved from big surpluses to a growing deficit, it’s helpful to examine each of the major factors driving our nation’s current deficits.
2. Every million additional jobs we generate reduces the deficit by $54 billion.
3. It’s misleading (and dangerous) to confuse the short-term budget shortfall with the medium-term deficit or the long-term debt. Here’s a way of understanding it:
- The Short-Term Recession Shortfall (1-3 years): The Great Recession was responsible for 61 percent of the deficit last year.
- Tax receipts fell as people lost jobs and income and businesses failed; federal tax revenues declined from 18.5% of GDP in 2007 to 14.8%.
- Spending rose with government supports such as unemployment insurance, the Recovery Act, TARP funds, payments to Fannie Mae and Freddie Mac and discretionary outlays for defense spending, from 19.6% of GDP in 2007 to 24.7%.
- The Medium-Term Bush Deficit (10 years):
- We ran a $236 billion surplus before the Bush tax cuts, but we have run deficits for the past 9 years.
- The ten-year projected deficit is entirely explained by the economic downturn, the Bush tax cuts and the wars in Afghanistan and Iraq. Bush tax cuts and the wars made up $500 billion of the 2009 deficit and will create $6 trillion in deficits and debt service over the next decade.
- The Long-Term Health Care Costs Debt (30 years +):
- The rapidly rising cost of private health care — doctor’s visits, prescription drugs, procedures — is the only truly unsustainable part of the long-term budget. If U.S. health care costs were growing at the rate of other wealthy countries, we would have no long-term debt problem.
- Social Security does not significantly contribute to the long-term debt picture. Its total shortfall is projected to be 0.7% of total GDP of the next 75 years, a small effect on the budget compared to the economic downturn and the Bush-era tax cuts, which will, over the next decade, consume 1.5% and 2.6% of GDP respectively.
4. A bi-partisan taskforce has identified over $1 trillion in defense spending that could be saved over ten years to reduce the deficit without jeopardizing national security.
5. The claim that the United States faces over $63 trillion in liabilities, unfunded retirement and health care obligations is based on deceptive and misleading figures-which are based on projections of health care costs over 75 years, and assumes no changes in tax revenues or reductions in health care costs.
- The CBO estimates that between 2012 and 2020, the debt held by the public will only rise by around 1%, far from the rapid ballooning that these claims make.
6. Most economists agree that debt held by the public — rather than gross debt — is the proper measure on which to focus because that’s what really affects the economy. Studies showing the U.S. near a debt “tipping point” of 90% of GDP make improper comparisons between the U.S and other countries.
7. Contrary to general belief, high debt does not necessarily lead to slow growth, but rather slow growth can lead to growth in debt.
photo credit: thanks to dbking via flickr