December 20, 2010

A Guide to Understanding the U.S. Government Debt and Deficits

Truth and Consequences
  • Margaret Polski

  • Sarah Nutter

    Senior Scholar
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There is broad consensus among citizens, elected representatives, and federal administrators that the United States government is on a fiscally unsustainable path. Since 2000 federal outlays have exceeded federal revenues in each fiscal year creating deficits, and deficits are projected for the foreseeable future. Our national debt is currently about 60 percent of the value of all goods and services produced in the U.S. economy and could reach an amount in excess of 100 percent of Gross Domestic Product (GDP) by 2020.

Tackling debt and deficits is a national security issue that affects our ability to compete in the international system. The proportion of U.S. government debt held by foreign entities has significantly increased. However, contrary to conventional wisdom, foreign debt holdings are more diversified than they have been in the past: 54 percent of foreign-held debt is held by investors located in a wide range of countries.

Debt and deficits are also a strategic challenge in our domestic political economy: mandatory spending on transfer payments to individuals is increasingly crowding out discretionary spending on inherently governmental functions. While increasing global competition and an aging population will make it more difficult to improve the U.S. government’s fiscal position, it can be corrected and it does not depend on political affiliation or the structure of government.

Democrats, Independents, and Republicans have all demonstrated that they can create deficits and debt and reduce them, and they have done so with unified and divided government. We are all part of the problem and we must all be part of the solution, which will require that we commit ourselves to engaging in reasoned problem solving based on hard facts rather than scoring points in an increasingly self-destructive game of fiscal fantasy.