Mountains of Debt

Mar 1, 2010

The gross federal debt will rise to more than $15 trillion by the end of September 2011, according to projections from the Office of Management and Budget (OMB). This mountain of debt has been accumulating rapidly since about 1982, when tax cuts reduced revenues and accelerating military spending increased outlays.

Except for significant reductions in the debt between 1994 and 2000, the upward trend has continued steadily, with a steep rise beginning in 2008. The OMB, which advises the president and Congress on budget matters, projects a long, high plateau for the national debt compared to the nation’s productivity (gross domestic product or GDP,) through 2019.

Accumulating debt isn’t always a bad thing. Economists might disagree on a healthy level of national debt, though they mostly agree that some debt is acceptable. Debt can enable long-term investment, and it may be necessary to incur debt in an emergency, such as to respond to the economic crisis of the past few years. Most economists agree, however, that the debt burden that the nation now faces is unhealthy and perhaps unsustainable. In particular, economists cite:

  • The cost of interest payments. In 2011, interest on the federal debt is projected to be the second largest mandatory spending item after Social Security, more than Medicare or Medicaid.
  • Decreased reserves in the Social Security Trust Fund. This fund has been a large investor in government bonds and other securities, but soon “baby boomer” retirees will stop contributing to the fund and begin drawing benefits.
  • Increased role for foreign holders of the national debt. As of FY2009, 48 percent of the debt was held by foreign holders, with 10 percent each held by Japan and China.

What Builds the Mountain?

More spending than income in any given year creates a deficit; yearly deficits add to the mountain of debt. Most federal budgets in the last 30 years have contributed to the deficit. Excluding the extraordinary deficits incurred between 2009 and 2011 to respond to the economic crisis, the deficits predicted for President Obama’s budget proposals are comparable over the next 10 years to the deficits incurred between 1982 and 1993.

What Brings the Mountain Down?

Members of Congress typically look at spending cuts to reduce deficits. They usually try to avoid raising more revenue through taxes, which are more politically challenging.

Yet taxes – and specifically tax cuts – are a very important part of the balancing equation. When the nation’s checkbook departs from the ideal of progressive taxation – relatively more revenue from those who are relatively more able to contribute – the associated costs can be great.

In 2001 and 2003, the Bush administration proposed and Congress approved several tax cuts. While some of the credits and adjustments affected all taxpayers, most of the money went to taxpayers with very high incomes. The tax cuts were temporary; most are scheduled to expire at the end of 2010.

Though some of these tax cuts may have had their desired stimulative effect on the economy, the nation paid a significant price for them. By 2005, the tax cuts had already cost the U.S. treasury $539 billion according to a Congressional Budget Office (CBO) analysis.

In 2008, when President George W. Bush proposed to make these tax cuts permanent, the CBO estimated that the cost of renewing the tax cuts (other than the one providing relief from the Alternative Minimum Tax) from 2009 to 2018 would be $3.8 trillion. A 2008 Tax Policy Center analysis estimated that $1.2 trillion of this cost would directly benefit households with incomes in the top 1 percent of all U.S. households.

Meanwhile, the annual cost of the tax cuts would exceed the entire budget of the Department of Veterans, or the entire Department of Education, or the combined budgets of the Departments of Energy, State, and Housing and Urban Development, according to the Center on Budget and Policy Priorities.

President Obama has proposed to allow these tax cuts to expire to help reduce deficit spending.

The Whole Spending Picture

Over and over again, when presidents and Congresses consider spending reductions, they focus on cuts in domestic programs and international assistance programs. The Pentagon budget and related military spending, which takes up about 40 percent of the general fund, is usually sacrosanct. This year is no different. President Obama proposed a three-year freeze on overall discretionary spending – exempting the Pentagon budget. Despite some proposed cuts, the Pentagon budget would rise by about 4 percent. Going Forward with Intelligence and Integrity

The way to come down from this mountain is through careful planning and realistic choices that focus on involving everyone in the U.S. economy.

  • Focus on including low-income individuals and families in the economy. Good jobs with wages that can support a family will contribute to the tax base, support the Social Security system, and reduce the need for social services and income supports.
  • Make the tax code more progressive. Any changes in the tax code – extending expiring tax cuts or offering new ones – should lower the relative taxes of lower income people rather than those at the top. Emphasis on preserving the disposable income of lower income people offers not only more fairness but also a more immediate stimulus to the economy.
  • Make job creation and sustainable new industries a high priority for federal spending. Even without the current recession, the U.S. industrial base needs to be in transition toward a new economy. This change requires a substantial infusion of capital.
  • Broaden access to comprehensive health care in order to keep health care costs down. Health care costs are one of the chief drivers of deficit spending.
  • Review and eliminate unnecessary, ineffective, and redundant spending programs. About $60 to $70 billion could be trimmed from the Pentagon budget by eliminating outdated, non-performing, and redundant weapons systems, as identified by the Institute for Policy Studies’ Unified Security Budget. This is a small percentage of the overall Pentagon budget but would be more than enough to double the budget for health care for veterans. President Obama’s budget includes a long list of “Terminations, Reductions and Savings.” Most are in domestic programs; some are very small, but the careful review is the right idea.

The military budget, however, will continue to grow every year until there is a fundamental review of the ever expanding mission of the U.S. military.

From FCNL's March/April 2010 Washington Newsletter
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