issue guide: National Debt

Background & Facts

see also the skinny, pro & con, links

What exactly is a debt and deficit

Debt is the total amount the government owes at any point in time. The budget deficit is how much more the government spends than it earns (in taxes) in a given year. When the government has a budget deficit - as opposed to a balanced budget or a budget surplus - it has to borrow to make ends meet, just as anyone else does. The government borrows money by selling government bonds and securities, which are, roughly speaking, written promises to pay back the lender at a future date with interest. The more the government has to borrow, it will be obvious, the bigger its debt becomes.

You can think of the government's debt like you would a household's debt. If a family has to borrow $100 in a given year to buy a T.V, that $100 would be a “deficit” (i.e., the amount of money it is required to spend above its income). If that same family has to borrow $100 each year for three years for a television set, a refrigerator and a stereo, its total “debt” (i.e., all of its deficits added up) would be $300 - this is the total amount that that family would be require to repay with interest.

When it comes time to pay its lenders, there are three ways the government can go: it can borrow money from new sources, raise tax rates or wait for the economy to grow and naturally bring in more tax revenue.

Our debt and deficits

2006's deficit was $331 billion, bringing our current debt to over $8.1 trillion (about 2/3rds of our GDP). The amount the government has to pay in interest on that debt is approximately $320 billion. (The Congressional Budget Office usually refers just to the "net interest", which it calculates at about $153 billion in 2003. The net interest does not count the interest the government pays itself for its "intergovernmental loans" - see below.)

Government debt is held in two ways: debt held by third parties (for example, you, if you bought a government bond, foreign nations that purchase government bonds, etc.), which is also called debt held by the public; and intragovernmental debt. Intragovernmental holdings will seem odd to those unfamiliar with them; they are, in essence, debt that the government owes itself when it borrows from its own trust funds. The biggest example is the Social Security Trust Fund, which is a buffer fund to help pay Social Security payments in the future. The money in the trust fund is currently being loaned to the government, which will eventually have to pay the fund back - in the case of the Social Security Fund, sometime before 2020. Almost one half of the “debt held by the public” is owned by foreigners.

Comparing deficits

To measure how serious the deficit is analysts often look at the deficit in comparison to the Gross Domestic Product (GDP - which is basically how much our economy produces in a year). In theory, if the debt grows but the economy as a whole grows even faster, the deficit won't have as strong of a bite. This is because the larger the economy, the easier it is for the government to collect taxes to pay down the debt without causing too much pain. Using that measure, we can also compare today's deficit to past deficits: we currently are running a deficit at about 3.6% of GDP - the average deficit between 1962 and 2001 was 2.1% of GDP, but in the early 90s the deficit hovered around 4% of GDP.

Source: CBO and OMB

1999-2001 was a period of rare surpluses. The current turn toward budget deficit is partly the result of a downturn in economic activity, increased defense spending because of the war in Iraq and the president's tax cuts.

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