Improving the Accuracy of U.S. Government Debt Estimates

U.S. government estimates suggest that growing public debt threatens the stability of the financial system. However, there is wide variability across estimates of the size and trajectory of federal debt levels and the forecasting track record is poor. This paper analyzes the differences among estimates and argues that modeling innovations are needed to improve public financial policy making and administrative management. The Government Accountability Office should take a lead role in coordinating new investments in economic and financial research across the U.S. government.

There is broad consensus among American citizens, elected representatives, and federal administrators that the U.S. government is on a fiscally unsustainable path: Our national debt is currently 62 percent of the value of all goods and services produced in the U.S. economy and, absent concerted action, it could reach an amount in excess of 100 percent of gross domestic product (GDP) by 2020, threatening stability and prosperity at home and abroad.1

While there are many challenges associated with improving the U.S. government’s financial position, experience demonstrates that progress can be achieved with effective budgeting, financial planning, and policy making. However, each of these exercises requires sound estimates of needs, events, and trends: We can’t make good decisions about allocating and managing public revenues if we do not have a good understanding of our current situation and how it may change over time.

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1. In this paper we define national debt as all debt held by the public, which is the amount the government borrows in financial markets by issuing short and long-term debt securities. Governments borrow for investment, to smooth operating cash flow, and to finance consumption that exceeds current revenues. While governments may repay debt by selling assets, it is more common to repay debt with revenues, which increase when the economy grows. Hence it is common to analyze government debt as a percentage of national income, which indicates the extent of leverage on future public revenues. For a more detailed overview of U.S. government debt and deficits, see Polski and Nutter (2010).