Budget planners differ on the details, but they agree on one thing: There will be massive increases in the national debt during each of the next five years. Not everyone is alarmed by the rising national debt or the recent budget deficits, which total more than $2 trillion over the 2002-08 period. “Budget deficits are such a small part of the economic equation, they are to be ignored,” said Ryan Ellis, tax policy director at Americans for Tax Reform.
“When compared with the balance sheet of the nation,” deficits are “minuscule,” said James Galbraith, an economist at the University of Texas who essentially ignores the $4.2 trillion in intragovernmental debt. “Debts from one government agency to another are, of course, merely accounting,” he said.
An opposing school of thought predicts dire consequences.
“National debt is growing at an alarming rate at the same time that people will begin to rely on the government for Social Security and Medicare more and more,” said Addison Wiggin, co-author of the book “Empire of Debt” and executive producer of the documentary “I.O.U.S.A.,” which is playing at theaters throughout the country.
Mr. Wiggin considers the national debt to be “the greatest threat to national security apart from a terrorist acquiring a nuclear bomb.” Fiscal challenges facing the United States, he said, are “much greater than the costs of the current wars” in Iraq and Afghanistan.
David Walker, the former U.S. comptroller general whose “Fiscal Wake-Up Tour” is documented in “I.O.U.S.A.,” agrees.
He argues that America’s fiscal irresponsibility is a greater danger to the republic than “someone in a cave in Afghanistan or Pakistan.” In recent testimony before the House Budget Committee, Mr. Walker warned: “Based on historical tax levels and absent meaningful entitlement, spending and tax reforms, the United States will face debt burdens in the future that would make Third World nations look thrifty.”
Three very different budget plans this year - the White House budget, the Democratic-crafted congressional budget resolution and an alternative budget offered by House Republicans - have two things in common. First, by using highly questionable assumptions, all three five-year blueprints are able to project minuscule budget surpluses in 2012 and 2013. Second, they all forecast massive increases in the national debt during each of the next five years, including the surplus years.
All three budgets provide the customary five-year breakdown (fiscal years 2009 through 2013) for outlays, revenues, deficits and debt. Each plan assumes that the national debt will approximate $9.6 trillion when fiscal 2008 ends on Sept. 30. That debt level is divided between $5.4 trillion in publicly held debt (which essentially represents the net balance of all previous surpluses and deficits) and $4.2 trillion in government-account debt (mostly trust funds).
Each five-year blueprint would raise the national debt by more than $2.25 trillion, which is significantly higher than the change in publicly held debt resulting from annual budget deficits and surpluses.
What accounts for such huge differences between annual budget deficits and surpluses, on the one hand, and the annual changes in the national debt on the other? Essentially, the change in the annual national debt level includes increases in debt held by government accounts.
Trust funds are the largest of these accounts by far. The largest trust funds involve Social Security, Medicare and retirement and health care plans for both the military and the federal civilian work force.
Although the White House’s budget plan, issued in February, projected a $48 billion surplus in 2012 and a $29 billion surplus the next year, the national debt still would rise by more than $400 billion each year, an analysis by The Washington Times has found. The White House’s Mid-Session Review, which was released in July, forecasts a record nominal budget deficit of $482 billion for fiscal 2009. During the same year, however, the national debt is predicted to soar by a record $817 billion.
The congressional Democrats’ five-year plan also projects budget surpluses in 2012 ($22 billion) and 2013 ($10 billion), but the national debt still would rise by nearly $350 billion in each year. In 2013, when the House Republican budget forecasts a $2 billion surplus, the national debt would soar by nearly half a trillion dollars.
Mr. Galbraith, the University of Texas economist, considers publicly held debt the “economically interesting” figure. The annual changes in publicly held debt essentially represent the demands of the federal government on the world credit markets. If the United States runs a $482 billion budget deficit in 2009, even as its national debt is scheduled to rise by more than $800 billion in the same year, the government will have to borrow “only” $482 billion in the world credit markets. The U.S. government would borrow the difference between $482 billion and $817 billion internally, mostly from trust funds generating surpluses.
Mr. Galbraith focuses on the relationship of publicly held debt to gross domestic product (GDP). Publicly held debt as a percent of GDP increased from 26 percent in 1981 to 49 percent in 1995 before declining to 33 percent in 2001. While it is predicted to exceed 40 percent in 2009, Mr. Galbraith argues that “the numbers projected are well within recent historical norms. In my view, other issues are far more significant.”
Not everyone agrees on this issue, either.
Citing data from the Congressional Budget Office, Rep. Paul Ryan, Wisconsin Republican, said, “By 2031, [publicly held] debt, which was 37 percent of GDP at the end of 2007, would reach 109 percent of GDP, more than double the debt reached during the Civil War.” According to Mr. Walker, the former comptroller general, “Our related debt/GDP ratios escalate dramatically after the 2040 date because we will have passed the ‘tipping point’ by then.”
To reach their surpluses, all the budgets made some questionable assumptions, including fudging spending for the wars in Iraq and Afghanistan. The president’s budget requested just $70 billion for Iraq and Afghanistan in 2009 and nothing thereafter. The other two budget plans did the same.
The three budget blueprints also assumed that Congress and the White House would permit the alternative minimum tax (AMT) to apply to tens of millions of additional middle-class households even though no leader of either party expects that to happen. The AMT gambit, however, enabled all three budget plans to include about half a trillion dollars of additional tax revenues over the five-year period, according to Congressional Budget Office calculations.
Notwithstanding these questionable assumptions, proponents of all three budgets hailed their success in achieving budget surpluses, minuscule though they may be.
Despite projecting a five-year cumulative deficit of $585 billion, the White House’s budget would raise the national debt by $2.63 trillion over the same period. Thus, the increase in the national debt would be $2 trillion higher than the cumulative deficits.
Put another way, while forecasting an average annual deficit of $117 billion, the White House budget plan would raise the national debt an average of $526 billion per year. The White House budget projects that the national debt would total $12.26 trillion at the end of fiscal 2013.
By Washington standards, the House Republican budget literally slams the brakes on spending. Federal outlays in 2013 would be just 9 percent higher than 2008 outlays. Its average annual spending increase of 1.7 percent would be well below inflation.
Nevertheless, the Republican House budget would raise the national debt by $2.66 trillion (or $532 billion per year) to $12.23 trillion by 2013. While forecasting a budget surplus of less than $2 billion in fiscal 2013, the House Republican plan reveals that the national debt would rise by $488 billion that year.
According to the Democratic-fashioned budget resolution, spending in 2013 would total $3.46 trillion. That’s well above the $3.2 trillion the House Republican budget would spend, but it’s not significantly different from the $3.4 trillion in spending forecast by the White House for 2013. The Democratic budget resolution would raise the national debt by $2.26 trillion ($452 billion per year) to $11.83 trillion by the end of fiscal 2013. Despite budget surpluses of $22 billion in 2012 and $10 billion in 2013, the Democratic plan would raise the national debt by $347 billion in 2012 and $348 billion in 2013.
All of the trust funds have been accumulating surpluses in recent years. For example, payroll taxes for Social Security have greatly exceeded benefit payments. This cash surplus is then lent to the federal government, which spends the money on other programs. In return, the government issues special Treasury debt securities to the Social Security trust funds. In addition, the Social Security trust funds receive interest income earned from previous loans to the government. The government makes these interest payments by giving the Social Security trust funds more Treasury debt securities.
During fiscal 2007, the government issued $187 billion in Treasury debt securities to the Social Security trust funds. About $106 billion of that was for interest. The balance reflected the excess of payroll taxes over benefit payments. At the end of fiscal 2007, the two Social Security trust funds held nearly $2.2 trillion in Treasury debt. These were assets for the trust funds but liabilities for taxpayers.
Altogether, government accounts (mostly trust funds) lent the federal government $293 billion in fiscal 2007, helping to ratchet down the deficit to $162 billion. The trust-fund money dramatically reduced the funds the government had to borrow from the credit markets. The same money was spent on other programs. In effect, this nearly $300 billion windfall partly financed tax relief, the wars in Iraq and Afghanistan and farm subsidies for millionaire farmers, to name just a few government policies.
If the government did not previously borrow from these trust funds (which required it to make interest payments to the funds) and if the government did not have access to the trust funds’ cash-flow surpluses last year, it would have faced some unappetizing options to address what would have been an additional budget shortfall of $293 billion. It could have cut spending. It could have increased taxes. It could have borrowed more from the credit markets. Or it could have pursued a combination of these options.
If it took the easy route (borrowing more), the official $162 billion budget deficit would have exceeded $450 billion.
The White House’s Mid-Session Review forecast a deficit of $482 billion for 2009. But the government also will be borrowing $335 billion from various government accounts. That means the national debt will rise by more than $800 billion in 2009. That has never happened before.
At some point, these trust-fund surpluses will end as baby-boomer retirees make their claims on the various trust-fund assets, which actually are debts to the government (and the taxpayers). The 2008 annual report by the Social Security trustees declared that “projected [trust-fund] tax income will begin to fall short of outlays in 2017.” At that point, the shortfall will have to be financed by general tax revenues, such as the income tax, or by borrowing still more in the credit markets.
Today, even with the help of hundreds of billions of dollars flowing into the Treasury each year from the trust-fund surpluses, general revenues are not even close to paying for the other government programs. That’s why the nation has huge deficits.
What will happen when the trust-fund cash-flow surpluses become cash-flow deficits? As a simple matter of arithmetic, the budgetary pain in Washington will be far more severe than anything experienced today.
Despite the fact that the Democratic-crafted budget, the White House budget and the House Republican budget all project relentlessly rising national debt levels for the next five years (and, inevitably, beyond), it was not always so. As recently as 2000, the national debt declined by more than $100 billion as the budget surplus during that calendar year exceeded borrowings from the trust-fund accounts.
It has been relatively painless in recent years to finance the debt from the nation’s soaring budget deficits because foreign borrowers have bought so much of it. As recently as 1970, foreign investors held just 5 percent ($14 billion) of the publicly held debt. By 1997, foreigners held 33 percent ($1.23 trillion) of publicly held debt. In 2001, the last year of the four-year string of surpluses, foreigners held 30 percent ($1 trillion) of publicly held debt.
Mr. Wiggin, the author of “Empire of Debt” and the producer of “I.O.U.S.A.,” poses a simple question: “When so much debt is held by foreign investors, will we worry about what our complacent politicians say or what our foreign bankers say?” He worries that policymakers do not appreciate “the very precarious situation we are in,” especially given the “overt statements coming recently from [the Organization of the Petroleum Exporting Countries], Russia and China about the dollar’s future role as the world’s reserve currency.”
With China’s foreign currency reserves exceeding $1.8 trillion, including more than half a trillion dollars in U.S. Treasury debt and nearly $400 billion in “agency” debt (Fannie Mae and Freddie Mac), Mr. Wiggin argues that politicians and policymakers should take notice of China’s explicit threat last year to use its reserves in the future as its “nuclear option” with the capability of sending the value of the dollar crashing and, implicitly, the U.S. economy with it.
Pete Peterson, the former commerce secretary, recently established the Peterson Foundation and hired Mr. Walker, the former comptroller general, to sound the alarm about America’s growing indebtedness. One of the foundation’s first official acts was to purchase the “I.O.U.S.A” documentary to ensure its maximum exposure.
Mr. Peterson is worried that Congress and the White House won’t do anything about America’s long-term fiscal problems until a crisis erupts.
“The most likely crisis will come from the foreign capital markets, when they lose confidence and stop funding our deficits,” he said. “The dollar would fall steeply and suddenly, and interest rates would rise dramatically.” Noting America’s “unprecedented level of foreign borrowing,” Mr. Peterson recently told reporters at a Christian Science Monitor breakfast, “I assure you it won’t be too long before we start looking like a developing country.”