March 21, 2011

Long-Term Spending is Unsustainable

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There is a long-term divergence between the amount of money that the federal government spends and the amount of money that it collects in tax revenue.  This has implications for deficits, debt, and economic growth.

When the federal government spends more than it collects, it runs a deficit.  To fill this gap, the Treasury Department must borrow from investors, incurring debt.  As our debt grows, the interest payment on that debt grows as well. If we do not change course, servicing this debt will end up as our biggest budget item. Given current policies, the Congressional Budget Office projects that the cost of the debt as a percentage of gross domestic product (GDP) will explode from a mere 1.8 percent of GDP in 2012 to 46 percent of GDP in 2084.