U.S. Deficit Lower Than Before The Financial Crisis

Good News Tempered By Debt Load

U.S. Deficit Lower Than Before The Financial Crisis
December 24, 2015

As of this writing, the U.S. national debt is over $18.7 trillion, or over $58,255 for every one of the over 321 million men, women, and children in America. Our government keeps adding to the debt by running deficits, as it has since 2001. Within that background, we present a bit of good news: the deficit for fiscal 2015 is the lowest since 2007. We only overspent by $439 billion in fiscal 2015, compared to a $161 billion deficit in 2007. The deficit was down to only 2.5% of the gross domestic product (GDP).

While we may be going in the right direction, we are still adding to an overall debt load that could reach unsustainability on its current trajectory. The total debt-to-GDP ratio is 73% based on federal debt that is held by the public. If you add intragovernmental debt — the money that the government owes to government trust funds like Social Security but has already spent on other things — to create a total debt number, the debt-to-GDP ratio rises over 100%.

Worse still, the baseline projection of the Congressional Budget Office (CBO) shows that by 2039, the debt-to-GDP ratio based only on the debt held by the public will top 100%, closing in on the record debt-to-GDP caused by the spending necessary to fight World War II. It is unlikely that the Social Security trust fund will have been replenished by then given the retirement of the large baby boom generation, so the total debt-to-GDP ratio is likely to reach uncharted territory.

At least at the moment, the debt load is not rising as much as it could because of extremely low interest rates. It cost 1.3% of GDP just to service the debt load in 2015, compared to 1.7% in 2008. Eventually interest rates must rise, compounding the overall debt problem.

Unfortunately, during a presidential election season, it is difficult to find a candidate that looks at a balanced budget as a priority. Those who do truly believe in fiscal restraint, like Rand Paul, are getting crushed in the polls. Republicans who are focused on shrinking the size of government are all for cutting spending, but they are also for creating tax cuts that add to deficit spending without extremely optimistic growth assumptions. Democrats are for raising taxes on the wealthy but typically use that funding to increase spending.

The Wall Street Journal correctly identifies the issue — deficits have fallen generally because of increased revenue instead of decreases in spending. Government spending increased by 5% last year and is still higher than any value between 1993 and 2008 as a share of GDP.

The winner of the 2016 presidential election will be in a difficult position with respect to the budget. Non-discretionary spending on items like Social Security and Medicare benefits are crowding out other opportunities to cut expenditures. The Office of Management and Budget appropriations numbers for fiscal 2015 showed that just over 70% of expenditures are either mandatory spending or interest on the accumulated debt.

Arguably, too many of the remaining cuts have fallen on areas like research and infrastructure — not to mention education. It could be worse — remember that we are still under sequestration for defense spending, which is keeping overall military spending down from what it could be.

Let's enjoy what good news we have on spending while we can. Based on most economic projections and candidate promises, this may be as good as the news on the deficit front will get for a long time.

If you want to settle outstanding debts for less than what you owe, try our debt settlement tool.

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