The level of government debt of the United States has always been controversial. But since four consecutive years of $ 1 trillion budget deficits (2009-2012) have pushed the government debt to more than 100% of gross domestic product (GDP), it is easy to understand why people (beyond politicians and economists) are starting to spend this much attention to the problem. Unfortunately, the way in which the debt level is explained to the public is usually quite obscure. Link this problem to the fact that many people do not understand how the level of the national debt affects their daily lives and that you have an important topic of conversation and confusion.
National debt vs. budget deficits
First, it is important to understand the difference between the annual budget deficit (or budget deficit) of the federal government and the outstanding federal debt (or the national public). debt, the official accounting term). Simply explained, the federal government generates a budget deficit when it spends more money than it generates through revenue-generating activities such as individual, corporate, or excise duties. To be able to work in this way, the Ministry of Finance must issue treasury bills, treasury bills and treasury certificates to compensate for the difference: finance the deficit by granting loans to the public (which includes both internal and outside Anandan investors, companies and other governments) In other words. By issuing this type of securities, the federal government can acquire the money it needs to provide government services. The federal or national debt is simply the net accumulation of the annual budget deficits of the federal government: it is the total amount that the US federal government owes to its creditors. To make an analogy, the budget deficits are the trees, and the federal debt is the forest.
Government borrowing for the government debt deficit can also take other forms – issuance of other financial collateral, or even borrowing from global organizations such as the World Bank or private financial institutions. Because it is a loan at governmental or national level, it is called national debt, government debt, federal debt or government debt.
The total amount that can be borrowed by the government without the consent of Congress is called the total government debt with a limit of . Any amount that must be borrowed above this level must receive additional approval from the legislature.
The government debt is calculated daily. After receiving the end-of-day reports from about 50 different sources (such as the Federal Reserve Bank branches) regarding the number of securities sold and repurchased that day, the Treasury calculates the total outstanding government debt, which is released the next morning. It represents the total negotiable and non-negotiable principal amount of outstanding issued securities (ie not including interest).
The government debt can only be reduced through five mechanisms: higher taxes, lower expenses, debt restructuring, monetization of the debt or outright default. The federal budget process deals directly with taxes and spending levels and can make recommendations for restructuring or possible default.
A brief history of the American debt
Since the beginning, the debt has been part of the activities of this country. The US government was in debt for the first time in 1790 after the Revolutionary War. Since then, debt has been fueled over the centuries by more war, economic recession and inflation. (Periods of deflation can nominally reduce the size of the debt, but they increase the fair value of the debt. “As the money supply is tightened, money is valued higher during deflation periods, so even if the debt payments remain unchanged, the borrowers will pay more. ).
In modern times, the government has struggled to spend less than 60 years, making a balanced budget virtually impossible. The level of government debt has risen over the course of President Ronald Reagan’s term of office, and the following presidents have continued this upward trend. The treasury direct. The gov website indicates that the national debt of the last two decades has consistently increased (see graph). Only briefly during the heyday of the economic markets and the Clinton administration in the late 1990s did the US debt ratio fall back materially.
Political disagreements about the impact of national debts and methods of debt reduction have historically led to many obstacles in Congress and delays in budget proposal, approval and appropriation. When the debt limit is maximized by spending and interest obligations, the president must ask Congress to increase it. For example, in September 2013, the debt ceiling was $ 16,600 trillion, and the government briefly closed disagreements about raising the limit.
From a government policy point of view, debt issuance is generally accepted by the public, as long as the proceeds are used to stimulate the growth of the economy in a way that will lead to the country’s long-term prosperity. However, if the debt is only increased to finance public consumption, such as the proceeds from Medicare, Social Security and Medicaid, the use of debt loses a lot of support. When debt is used to finance economic expansion, current and future generations will reap the rewards. However, debt used to increase consumption only provides benefits for the current generation.
Understand the national debt
Because debt is an unavoidable part of economic progress, it needs to be measured correctly to reflect its long-term effects. Unfortunately, evaluating the national debt relative to the country’s gross domestic product (GDP), although common, is not the best approach, for various reasons. To begin with, GDP is very difficult to measure accurately; it is also too complex. Finally, the national debt is not reimbursed with GDP, but with tax revenues (although there is a correlation between the two). Comparing the level of national debt with GDP is comparable to a person who compares the amount of his personal debt with the value of the goods or services that they produce for their employer in a given year.
The use of a per capita national debt approach provides a much better picture of where the country’s debt level is. For example, if people are told that the per capita debt is nearly $ 40,000, it is very likely that they will understand the magnitude of the problem. However, if they are told that the level of national debt is close to 70% of GDP, the magnitude of the problem may not register.
Another approach that is easier to interpret is simply to compare the interest charges paid on outstanding national debt in relation to the expenses incurred for specific government services such as education, defense and transportation.
Is national debt really that bad?
Economists and policy analysts disagree about the consequences of bearing federal debts. However, certain aspects have been agreed. Governments with a budget deficit must make up the difference by borrowing money, which makes capital investments in private markets superfluous. Debt certificates issued by governments to pay off their debts affect interest rates; this is one of the most important relationships manipulated through the monetary policy instruments of the Federal Reserve.
Keynesian macro-economists believe that it may be useful to create a current account deficit to boost overall demand in the economy. Most Neo-Keynesians do not rely on fiscal policy instruments, such as government deficit issuance, until monetary policy has proved ineffective and nominal interest rates have fallen to zero. Chicago and Austrian school economists claim that government deficits and debts damage private investment, manipulate interest rates and capital structure, suppress exports, and unfairly harm future generations through higher taxes or inflation.
Some believe that government debt is irrelevant when the central bank can print unlimited fiat money, although this is a minority view. History has shown that governments abusing the printing press suffer from terrible inflation, and this fear keeps policymakers from fully monetizing debts. Instead, the federal government must continue to borrow, sell assets, raise taxes, renegotiate terms or defaults to resolve debt problems.
What will the current national debt be?
As indicated above, debt is the net accumulation of budget deficits. It is important to look at the top expenditures, since these are the most important factors of the national debt. The top expenditures in the US are identified as follows (based on the total spending figures of the 2016 federal budget):
- Healthcare programs (including Medicare and Medicaid): A total of $ 1.1 trillion (USD) has been allocated to healthcare benefit programs, including Medicare and Medicaid.
- Social Security Program / Pensions: Focused on providing financial security to retirees, total social security and other expenses are $ 1 trillion.
- Defense Budget Expenditure : The part of the national budget allocated for military expenditure. Currently $ 1.1 trillion is reserved for the United States defense budget.
- Other: Transport, veteran benefits, international affairs, education and training, etc. are also expenses that the government must arrange. Interestingly, the general public belief is that spending on international affairs costs a lot of resources and expenses, but in reality such expenses are in the lower regions of the list.
What has made the national debt worse?
History tells us that the social security, defense and Medicare programs are among the top expenditures, even during the times when national debt levels were low, as they were in the 1990s. How has the situation deteriorated? There are different opinions on this issue:
- The overburdened social security system: Some claim that the mechanism to finance the social security system has led to higher expenses without clear payout. Payments are collected from current employees and are used for immediate benefits, that is, payments to existing beneficiaries. Due to the increasing number of pensioners and their longer lifespan, the size and costs of payments have increased. Parents with fewer children limit the number of current contributing employees. Recent economic recessions have also led to stagnant pay. In general, limited incoming and more outgoing cash flows make social security a major part of the national debt.
- Ongoing tax cuts introduced during the George W. Bush era : a report on the center for budgets and policy priorities indicates that the continued legacy of Bush’s policies and tax cuts ceases government income and thereby enforces large debts.
- Rights to healthcare : the costs and expenses for the Medicare and Medicaid programs have exceeded the projected figures. The general rise in the cost of medical expenses was the hidden culprit and amply outstripped inflation.
- Economic stimulus measures and related expenditures: The US economy has not been so healthy in the last 15 years. There was a tightening of growth rates to a smaller range and a higher frequency of recessions – even before the Great Recession began at the end of 2007. The attempt to bring the economy back to life led to further costs and expenses – the 2009 Incentive Package, tax cuts, unemployment benefits and financial sector rescue operations have led to further spending at national level. These efforts have succeeded in giving the economy a survival boost, but the return still has to be achieved, leading to ‘pure spending’. “
- The wars in Iraq, Libya and Afghanistan: mainly within the defense budget, the ongoing involvement in these agreements has cost the U. S. in the last decade, which has led to huge debts. The public outrage also stems from the belief that situations in these countries do not have a direct serious impact on American security because they are at a geographical distance. Around $ 1. 3 trillion has been spent on these commitments, which is a huge burden on the national debt. Some of these are still continuing, which further increases costs. While the expenses have risen, the revenues have arrived. Among the most important sources of income for the government:
Individual income taxes:
- This is the largest contributor to Uncle Sam’s revenue: individual taxpayers contribute nearly half of annual tax receipts. The challenge, along with the aforementioned tax cuts by Bush, was stagnant US salaries and therefore limited tax collection. Social security, pension and payroll contributions:
- This was the second important sector for government revenue, but contributions have not really increased since 2006 and even decreased in 2010 and 2011. Limited jobs and lower or stagnant salaries are the blockade for increases in this flow of government revenue. Corporate income tax:
- The third largest piece of the pie in the graph of government revenue, the inflow of corporate income tax, peaked in 2007, but has been showing a downward trend since then. Add to this the necessary incentives and rescue operations from the financial sector and corporate taxes have shown high fluctuations that led to uncertain income for the government. Excise duties:
- As with corporate taxes, excise duties have also shown poor collections. In short, the economic scenario over the past decade has led to more spending and a declining source of income, raising the national debt to $ 19. 3 trillion, or about $ 59, 794 per person, as of the 2016 fiscal year.
What the national debt means to you
Since the national debt has recently grown faster than the American population, it is fair to wonder how this growing debt affects average people. While it may not be obvious, national debt levels have a direct effect on people in at least five direct ways.
As the national debt per capita increases, the chance of the government failing to meet its debt service obligation increases and therefore the Ministry of Finance will have to increase the return on newly issued treasury bills to attract new investors. This reduces the amount of tax revenue that is available to spend on other government services, because more tax revenue has to be paid out as interest on the national debt. Over time, this shift in spending will lead to people experiencing a lower standard of living, as it becomes more difficult to borrow for economic improvement projects.
- As the interest rate on government bonds increases, business activities in America will be considered more risky, which means that the yield on newly issued bonds must also be increased. This, in turn, requires companies to raise the price of their products and services to meet the higher costs of their debt service obligations. As a result, over time people will pay more for goods and services, resulting in inflation.
- As the yield on treasury paper increases, the cost of borrowing money to buy a home will also increase, because the cost of money on the mortgage loan market is directly linked to the short-term interest rate set by the Federal Reserve and the return offered on treasury paper issued by the Ministry of Finance. In view of this established mutual relationship, an increase in interest rates will push down house prices, because potential home buyers are no longer eligible for the largest possible mortgage loan. The result will put more downward pressure on the value of homes, which in turn will reduce the net worth of all homeowners.
- As the return on US Treasury paper is currently considered a risk-free return and the return on these securities is increasing, investments such as corporate debts and shares, which entail some risk, lose their attractiveness. This phenomenon is a direct consequence of the fact that it will be more difficult for companies to generate sufficient pre-tax income to offer a high enough risk premium on their bonds and stock dividends to justify investment in their business. This dilemma is known as the displacement effect and tends to stimulate the growth of the size of the government and the simultaneous decrease of the size of the private sector.
- Perhaps most importantly, the country loses its social, economic and political power due to the risk that a country will fail to meet its payment obligations. This in turn makes the national debt level a national security issue
- Successful ways governments reduce federal debt