Aug 01, 2011
Ed Note: This post was originally published last fall, but in light of the recent debt ceiling negotiations and compromise we thought it was worth re-posting.
The federal deficit and the national debt have become major issues this election year, and the numbers themselves are pretty daunting: a deficit of $1.3 trillion this year, and a national debt that’s more than $13 trillion and climbing. Still, unless you’re a budget wonk, it’s easy to get the terms confused.
So let’s recap the basics. Here’s a quick overview of what the deficit and the debt are and what they might mean:
- A deficit happens when the government spends more than it takes in during a given year. This has pretty much been our default setting: the federal government has run a deficit for 31 out of the past 35 years.
- When the government runs a deficit, it borrows to cover the difference. When you buy a Treasury bond, this is what you’re doing: loaning money to the U.S. government.
- The national debt is the total amount the government has borrowed. Every time we run a deficit, we’re adding to the national debt. There are two types of debt you’ll hear policy types talk about.
- “Debt held by the public” means money the government owes to others, which means the Treasury bonds that you and banks and foreign investors can buy. Economists focus on this kind of debt because it has an impact on the broader economy. If public debt becomes too big, the risk is that it “crowds out” other investment; in other words, so much money is going into government borrowing that there isn’t enough for business loans, mortgages and so on.
- “Gross debt” is everything the government owes, the public debt plus what the government owes itself. Maybe you didn’t know that one part of the government can owe money to another part, but it’s pretty routine. The best-known examples are the Social Security and Medicare trust funds. This kind of debt doesn’t affect the overall economy in the same way as debt held by the public, but fiscal experts say this can have a big impact on the federal budget itself. As the expenses for Medicare and Social Security increase, for example, the government will have to shift money from other areas to repay these trust funds, potentially squeezing other priorities.
Deficits are fairly routine, and during a recession like the one following the financial crisis of 2008, they’re all but unavoidable. Tax revenue falls off when the economy slows down and government spending increases to try and turn things around.
The real concern is long-term. The government’s own budget agencies, including the White House Office of Management and Budget, the Government Accountability Office and the Congressional Budget Office, warn that federal deficits and the national debt will skyrocket as costs rise for Medicare, Medicaid and Social Security. The national debt is projected to be larger than our entire economy is roughly a decade.
We do have options for dealing with this. You can learn more at OurFiscalFuture.org on the Web, on Facebook, or @FiscalFuture on Twitter. Plus, you can keep up to date with our mobile phone app, available for free download for iPhone and Android.