It is far too early to even speculate who will win the White House and Congress next year, but it is fair to say that both parties will be responsible for reining in out-of-control spending. Let’s review the facts.
Within the next few days, the Senate will have to pass legislation raising the federal government’s debt ceiling, which stands at $8.965 trillion and will likely be reached by Monday (Oct. 1). Without an increase, the nation will be unable to redeem debt obligations as they become due or to borrow to keep the government fully operating.
Economists and policy-makers generally distinguish between two major levels of federal debt: (1) gross federal debt, which is identical to what politicians colloquially refer to as the “national debt”; and (2) federal debt held by the public, which is a subset of the gross federal debt. In addition to the debt held by the public, including the Federal Reserve System, whose coffers contained nearly $800 billion in federal debt at the end of fiscal 2006, gross federal debt also includes debt held in such accounts the Social Security and Medicare trust funds. Both debt figures are customarily measured in absolute dollar levels and as a percentage of gross domestic product (GDP), which represents total annual economic output. The debt ceiling directly relates to the gross federal debt, which is rapidly approaching the $9 trillion level. Debt held by the public pierced the $5 trillion level this fiscal year, which ends Sunday.
Although there is not a dollar-for-dollar correlation, the debt held by the public roughly increases each year by the size of the budget deficit (or decreases by the size of any budget surplus). Over the five-year fiscal period of 2002-06, for example, cumulative budget deficits totaled $1.515 trillion, while the debt held by the public increased by $1.509 trillion, rising from $3.32 trillion at the end of fiscal 2001 to $4.829 trillion at the end of fiscal 2006. Over the same five-year period, the gross federal debt increased by much more, rising by $2.68 trillion from $5.77 trillion at the end of fiscal 2001 to $8.45 trillion at the end of fiscal 2006.
Thus, gross federal debt increased nearly $1.2 trillion more than publicly held debt increased over the same 2002-06 period. This $1.2 trillion difference between the two debt figures largely represents the money that the government borrowed from trust-fund surpluses in government accounts (e.g., Medicare, Social Security, retirement accounts for federal employees and the military, etc.). The government spent these borrowed surpluses on day-to-day government operations, reducing the annual deficit from what it otherwise would have been. The borrowed money represents real debt that will have to be paid back — by our children.