The U.S. budget deficit is even worse than you think

August 25, 2009

Oh yes, America’s fiscal situation is a dreadful mess.

The White House says the federal government will run a $9 trillion budget deficit over the next decade. As a percentage of the total economy, the United States looks to have an astounding debt-to-GDP ratio of 11 percent this year, with that number declining to around 4 percent from 2015 though 2019. And total debt held by the public will rise to 68 percent of GDP by that year versus 33 percent in 2001.

Those numbers, however, are actually a bit on the rosy side. In his blog, Douglas Elmendorf, director of the Congressional Budget Office, notes that the forecasts presume no change in current tax laws, such as the continued existence of the Bush tax cuts and the alternative minimum tax (AMT), which grabs more and more taxpayers ever year at a lower and lower income level.

Such forecasts also assume annual spending increases grow at the rate of inflation. But tomorrow is rarely the same as today in Washington. A more realistic scenario — if the AMT were indexed for inflation, most of the Bush tax cuts continued and spending rose as it has in the past — would see the deficit at 8.5 percent of GDP in 2019. That is a level, before the current crisis, not seen since World War Two.

Budget numbers like these are generated on a cash accounting basis. They don’t take into account the underfunding of America’s vast entitlement programs and the annual changes in the net present value of those programs.

Calculated on an accrual basis, much as a corporation would estimate its pension and healthcare liabilities, the annual deficit number would be at least $6 trillion this year.  In 2008, for example, the headline budget number — the one calculated on a cash in, cash out basis — was $454 billion. But if you ran the number as the federal deficit plus the net present value of all those unfunded liabilities, the deficit was $5.1 trillion with total fiscal obligations at $66 trillion. As Elmendorf dryly puts it: “Putting the nation on a sustainable fiscal course will require some combination of lower spending and higher revenues than the amounts now projected.”

And that is The Choice. Does America want to be a low-tax nation with a government that does less than it does now, or a higher-tax nation with an even bigger public sector? Right now, it sort of wants both. You can see that not only in today’s budget numbers, but also in the healthcare debate, where a fair reading of the polls reveals Americans want to contain costs while also having every high-tech solution and test available to them.

The politicians are certainly no better. When the Republicans wanted to fix Social Security, Democrats argued the program was in good shape. And now when Democrats want to trim Medicare costs, the GOP plays the defender of seniors.

So put me down for 8.5 percent in the 2019 debt-to-GDP ratio office pool, OK?

28 comments

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US Debt as a percentage of GDP
2008 70.2%
2009 90.4%
US Federal Deficit As Percent Of GDP

2008 3.2%
2009 12.9%

CARRY A PLACECARD TO ALL EVENTS BY CONGRESSMEN AND EVENTS BY THE PRESIDENT
THAT SAY’S…
IT’S THE DEBT STUPID!!!!

Posted by Rong | Report as abusive

[...] Oh yes, America’s fiscal situation is a dreadful mess. Take a look: As a percentage of the total economy, the United States looks to have an astounding debt-to-GDP ratio of 11 percent this year, with that number declining to around 4 percent from 2015 though 2019. And total debt held by the public will rise to 68 percent of GDP by that year versus 33 percent in 2001. [...]

So where was this conversation the last 8 years? Why weren’t we hearing about it then? The trillion dollar debt didn’t materialize in the past 7 months. I am sick and tired of people who voted for the previous administration complaining about the deficit that THEY created. Especially since they had a SURPLUS to work with. Guess which political party was in charge of that? The so called “spend thrift” democrats. You really want to get rid of the deficit? Get rid of ALL social programs. Let’s see what kind of screaming that policy change brings forth. The people yelling the loudest about entitlement programs are the ones that use them most (hint, hint, all those gray haired folks on social security and medicare who tend to vote for the repbulicans). Some of this folks think that the government has nothing to do with these programs. I guess dementia is setting at an earlier age nowadays. I have a suggestion, if you don’t have a realistic solution to our problems, keep your mouth shut. Spreading panic and fear about a problem we have had for the last 25 years in a time of extreme uncertaintity is like screaming “fire” in a crowded theater.

Posted by BB | Report as abusive

>>> So where was this conversation the last 8 years? Why weren’t we hearing about it then? The trillion dollar debt didn’t materialize in the past 7 months. I am sick and tired of people who voted for the previous administration complaining about the deficit that THEY created.

Wrong… Obama increased the deficit 4X more in his first 100 days than the highest it had ever been previously. We’ve always had a debt. But this sort of irresponsibility had never been seen prior to this administration taking control. The reason it is being discussed is because it is unprecedented.

>>> Get rid of ALL social programs.

That’s the most intelligent you’ve said. And you mean THAT in jest!

Posted by moi | Report as abusive

I would comment about this but and normally would rip comments like “Moi’s” to shreds, but I’m tired of trying to make the blind see. It’s all Obama’s fault, you’re right. He blew it by saving AIG, Citi, BofA et al. Should’ve let them fail and let the chip fall where they may. He shouldn’t try to change the health system because it works fine… if you have it (of course, 16% of Americans DON’T.)

The choice is yours, and it’s a toughie. You can demand an end to these massive deficits today, but are you REALLY willing to accept the consequences of it. It would mean a staggering loss in quality of life and employment numbers. Government deficits are all the economy is running on now, and you complain it’s a terrible economy now. It’s all well and good to point fingers, but are you really ready to live the alternative?

Posted by the Shah | Report as abusive

“But tomorrow is rarely the same as today in Washington” and that is why you cannot use accrual accounting with the US budget.

Posted by J | Report as abusive

I am not particularly happy with all the spending and growth in government that took place in Bush’s second term. However, It must be pointed out that the Democrats have been in control of Congress for quite a while now.
OBAMA and the supermajority of Democrats in Congress are OUT OF CONTROL. We do not need a COMPLETE OVERHAUL of our Healthcare system. It is plain to see that everywhere it has been tried, IT HAS FAILED. So WHY are they pushing such MONUMENTAL CHANGES? The answer can only be POWER.
It honestly feels as tho they are trying to bankrupt our economy so that they can be the good guys who SAVE us, Where has that happened before (well Hitler did it in the 1930′s) and Chavez has done it in Venezuela. So PARDON ME if OBAMA (aka Barry Soetoro) makes me nervous, I think we have a right to be afraid of what his intentions are.

Posted by Nancy League | Report as abusive

“Government deficits are all the economy is running on now, and you complain it’s a terrible economy now.”

The alternative is that the economy runs on investment, which is a much better alternative. When the government runs deficits and debts it must borrow money and it borrows from the same place as everyone else – the market. Government debt crowds out companies and individuals from borrowing, and companies and individuals tend to make much more efficient decisions as compared to government.

Posted by J | Report as abusive

The political parties are both the same. Congress is not running the country nor is the executive branch. The financial community and the industrial community(including the health care people) are running country by managing whoever is in office. If taxes get too high they will move their operations. Look at all the operations that have moved in the last 15 years. Term limits and a Constitutional Convention are about the only things that will turn this around. I do think there will be a new third party arising real soon, but they will also risk being managed. I do not know the answer, I only see the growing problems.

Posted by f belz | Report as abusive

Obama has spent more than ALL U.S. Presidents COMBINED. Within 4 months he QUADRUPLED the deficit, and isn’t done yet. It is stunning to me at the obamatrons who pop out and say ”last 8 years’…when the deficit was a nickel to the now $100 dollar bill (as a comparison). And we weren’t letting terrorists go and prosecuting Americans, either!

Posted by Fred | Report as abusive

[...] James Pethokoukis says the deficit projections are even worse than Orszag admits: Those numbers, however, are [...]

The looming massive government debt & deficits can be quite alarming. It is useless to place blame, we are all at fault. Reducing Federal government spending should be a priority in the future. This should include reductions across the board- not just social programs, but defense, foreign aid, etc..

Unfortunately, these solutions are not appropriate for the current climate. They should be a long term goal.

In the current economic climate, it is prudent to run budget deficits.They help to counteract the significant reduction in private spending.

A case in point is Poland in the early 90′s. At the time the IMF had made the elimination of budget deficits a requirement for loans. The Polish government attempted to pursue this policy. However, if one examines the numbers, when Poland reduced its budget deficit, everything went south. Unemployment skyrocketed, private enterprise collapsed, and unions and politicians screamed bloody murder. They tried to cut too much, too fast, in a partially socialized economy. While the current mess is much broader in scope and impact, there are lessons to be learned.

A small budget deficit has been found to be economically beneficial. Just chasing statistics in order to achieve a budget goal is unwise. Yes, the Debt to GDP ratio is currently alarming, except that we have just stared into the economic abyss. When in this type of situation, the government should spend, spend, spend. It can borrow, or print money to inflate its way out of debt. Either way, some entity needs to pick up the slack.

Maybe what we should be discussing is how to make government expenditures more efficient. It should not be about just cutting programs for cutting sake. It should be targeted. The cost benefit should be weighed carefully, from a technocratic as opposed to political perspective. State funding should be reevaluated. California is broke, even though we (the taxpayer) give them more than any other state, far exceeding their population difference.

Finally, the recently released numbers are based on projections which rely heavily on current spending levels. Those are certain to drop in the future. Also, how can we accurately predict the consequences of an improved economy? What new technologies and innovation will emerge, will we even be alive in 20 years?

Therefore, let the administration do their job. They inherited this fiscal mess, and I am sure they are capable of resolving it. However, it will be a very bumpy road, with no certainty, but hey, welcome to life.

Posted by Greg Harkness | Report as abusive

Obama is responsible for the huge budget deficit. Really? Which president was it that didn’t include the two pointless wars we’ve been fighting in his budget? Perhaps you should brush up on your math. Oh, that’s right the republicans can do no wrong. If they really wanted to have entitlement reform why didn’t they do it in the six years when they controlled every branch of government? The last time I checked the Bush administration had a very large deficit as well, but they came into office with a surplus. That’s an unrefutable fact. So what happened? How is it the the so called fiscal conservatives couldn’t hang onto that money? The republcians need to stop pointing fingers and take a long hard look in the mirror. They are responsible for this mess. It did not happen overnight.

Posted by BB | Report as abusive

Commenters, you must be careful, any nay-saying of Obama’s policy is considered ‘racist’. Why is it that I have a feeling a reprisal of the ‘Night of the long knives’ among the Dems is coming.

Posted by Rico | Report as abusive

The solution to out national debt lies in real health care reform:

We would need a bit more than $900 billion per year to fully fund a US version of the British National Health Service (universal health care).

How to pay for the US National Health Service? In 2007, the combined Federal, State, and local government expenditure on health care was $1035.7 billion. So, we can fully nationalize health care with the US National Health Service, and cut government health care spending by about $100 billion per year at the same time. No additional tax source is needed. Now $100 billion is not that significant, in relation to our $10+ trillion national debt – but by adopting a US National Health Service, we eliminate the need for private health care expenditures. Adopting a US version of Britain’s National Health Service will free up more than $1.2 trillion per year in funds no longer needed to pay for private health care expenditures. This money should be collected in the form of increased taxes, and used to pay down the (largely Republican-incurred) national debt – the national debt could be fully paid off within ten to fifteen years, if this is done.

The bottom line is that we are already paying for universal health care, we just aren’t receiving it.

/Data from: the Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Dept. of Commerce, Bureau of Economic Analysis; the U.S. Bureau of the Census; and the UK NHS

Posted by AC | Report as abusive

Let’s face it, we can only do one thing:

TAX THE RICHIES.

If the rich people made their fortunes in America, they might as well pay for that right. Either cut the budget or raise the taxes. The Chinese are not about to do that third thing anymore- and that is subsidize our lives here. The majority has spoken, and it wants healthcare that it doesn’t have to pay the brunt for.

Posted by Bob | Report as abusive

THE PEOPLE WHO ARE ON SOCIAL SECURITY NOW HAVE WORKED THE LAST 40 YEARS AND PUT MONEY IN IT. NOW WE HAVE SOCIAL SECURITY FOR THOSE WHO DONT WANT TO WORK AND HAVE PUT VERY LITTLY IN WHO GO ON SOCIAL SECURITY DISABILITY AND COLLECT WHO NEED TO WORK THE NEXT 40 YEARS TO BE ABLE TO GET IT. A LOT OF DISABILITY COMES FROM NOT PUSHING YOUR SELF BACK FROM THE TABLE AND TRY TO STAY HEALTHY. WAKE UP PEOPLE YOU BETTER STAND UP AND START YELLING.

Posted by JEAN SHEETS | Report as abusive

AS FAR AS THE DEBT WE NEED TO TAKE AWAY THE POWER OF THE IDOTS WHO MAKE THE DEBT. WE SHOULD NOT BAIL OUT CAR MAKERS OR BANKS AS THEY ARE PRIVETLY OWNED. DOES THIS MEAN WE NOW ALL OWN THE CAR MAKERS. DONT THINK SO AND ALL BANKS TO AS IT IS OUR MONEY. LEAVE MEDICAL CARE ALONE OR YOU WILL SCREW IT UP TO.

Posted by JEAN SHEETS | Report as abusive

[...] The U.S. budget deficit is even worse than you think – James Pethokoukis [...]

what about the cost of war? what if we were to quit fighting wars?

forget abut who is at fault, let’s just fix the problem!

Posted by ja | Report as abusive

Don’t you find it telling that Obama proposes to re-appoint Bernanke on the very same day that his administration and the CBO each publishes estimates of a bleak budget situation of the US in the next decade?

Posted by FrancG | Report as abusive

A couple of important numbers do not add up.

The article says, “total debt held by the public will rise to 68 percent of GDP by that year [2015 though 2019 - WHICH YEAR??] versus 33 percent in 2001.”

The post following the article by “permalink” on August 25th, 2009 at 2:53 pm GMT says,

“US Debt as a percentage of GDP
2008 70.2%
2009 90.4%
US Federal Deficit As Percent Of GDP”

How is it that “debt held by the public” will be only “68 percent of GDP” way out in [2015 though 2019 - which year??],” according to the article, yet debt as a percentage of GDP according to “permalink” will already be 90.4% in 2009?

Based on other reading, I think permalink’s numbers are more accurate. The US is already approaching a national cash debt (not counting $60+ Trillion or more in unfunded liabilities) approaching 100% of GDP. By 2015 or 2019, the US national debt should be well in excess of 100% – not 68% of GDP.

Could anyone clarify?

Posted by dick poe | Report as abusive

We can continue to blame each party for the mess our country is in, or we can pull all troops out of foreign countries, close our borders , send illegal aliens home, and worry only about what a mess our own country is in…I have last all faith in the politicans who think they know what is best for us..let them try out all the programs they want and if they succeed present it to us, their employers.

Posted by Nancy | Report as abusive

[...] the original here: James Pethokoukis » Blog Archive » The U.S. budget deficit is even … This entry is filed under Blog. You can follow any responses to this entry through the RSS 2.0 [...]

[...] the day went on I noticed more headlines. “The US budget deficit is even worse than you think“, “AFL-CIO President Named Head of New York Fed“, “Tax Penalties and the [...]

[...] more here: James Pethokoukis » Blog Archive » The U.S. budget deficit is even … Share and [...]

Both political parties are on the back of the tiger of a capitalist system dependent on finance capital dependent on debt creation (credit). When the private sector financiers stop creating debt (because they cant onsell it to retirees, county functionaries, etc), the government and taxpayers have had to fill the “credit deficit” or face economic destruction of nuclear strike proportions, and whatever may result socially and politically.
Other nations do not seem to have it so bad, partly due to less “capture” of regulatory agencies, and more “stabilisers” in their economies. Many in the USA seem to prefer a more boom-b ust scramble, especially if they have real wealth to trade the cycle and exploit the opportunities of cheap assets and desperate labor.
This comment is not to condemn capitalism any more than food.
The analogue is to “too much of a good thing”, need for diet choices, etc. The US economy seems like the fat guy in the burger joint eating until he spews, and avoiding responsibility by a heart attack emergency.

Posted by Survivor? | Report as abusive

It’s over for America. PRODUCERS, come with me. LOOTERS AND MOOCHERS, enjoy life without us.

Posted by John Galt | Report as abusive

In the 50/s we had fast cars-lots of money-responsibility(no no-fault insurance)-cheap gas-no lawsuits-and no problem with same sex marage-and people married for life not sex.Today-we stopped drilling for oil and buy it from the terrorists(takes All our money-stopped the 10 commandents so kids and parrents have no moral guide-are trying to teach same sex marrage-buy all our stuff from china and they take all our money and don,t buy things back so no jobs here-replace our machines with mexicans so we can pay their healthcare-have lawyers that sue everybody;but make nothing.So-no jobs-no money.no God!!

today

Posted by jimmy | Report as abusive

To the obamatrons who apparently won’t look at the numbers, below are the deficit numbers since 2001, with predicted totals for the One’s only term. Now you can stop pointing at vagaries and face the cold reality. Bush dramatically increased the deficit to the tune of 2,000 Billion dollars in 8 years. The One, will submerge us with 4,779 Billion dollars in new debt in half the time.

All this without taking in account the 1 trillion dollar health care boondoggle. Remember Congress was only off by a factor of 9 when they predicted, in 1966 a cost of $ 12 billion for Medicare, actual costs for Medicare in 1990 – $ 107 billion, and will be broke by 2019. Definitely a model for The One’s health care deforms.

You guys are complete loon or liars who won’t accept the fact that Obama is setting us a debt course that is disastrous, ill conceived and at odds with any fundamentally understanding of economic policy.

US Budget Deficit (in billions USD)
2001 +128
2002 -158
2003 -378
2004 -413
2005 -318
2006 -248
2007 -162
2008 -459
2009 -1,787
2010 -1,481
2011 -921
2012 -590

Posted by cottonmouth | Report as abusive

Let’s seriously consider banking and how debt-engineering is draining real wealth from workers, business owners and retired people.
Since 1913, the Fed was passed into federal law after most of Congress left for the holidays of Christmas. Ostensibly, it was argued that a central bank would somehow look after the country leaving panics and depressions behind. And so, it came to pass that one of the prime reasons of the American Revolution fighting the war over the external taxation of personal wealth without representation was overthrown by Woodrow Wilson with his signature into law of the “Fed”.
At core, fractional reserve banking would gradually expand the ratios where you could deposit $100 dollars into a checking account and this banking system would multiply this amount times 10 and loan back $1000 dollars. So, at 5% interest times 1000 dollars of virtual money, the bank receives 50 dollars interest on your money in a year or about half of your deposit into a bank checking account. Of course, this meant the banking system would have to print ever more money by this method further extracting wealth from labor and business alike.
In effect, checking bank accounts facilitate liquidity while we lose value in a currency becoming sinking debtors losing to Thomas Jefferson’s warning where we would lose our property and freedom to banking. YouTube offers Zeitgeistmovie and TheFed observations to this serious matter.

So, what do we do? Looking at the Federal Reserve System, one finds meager or non-existent reserves of cash. Ironic? Not really, remember the Federal Reserve Banking system is really a private company without much government scrutiny and without much reserve. In fact, if 10 percent of the public money were demanded back by the public at any given time, it would collapse. Even the FDIC could not bear the financial demand of this rush.
Given banking is the cause of this money drain, the simple fix would be to remove your money from checking accounts and shift to cash, your cash. If one person in 20 went to cash, the dollar would stop losing value so rapidly. The billions in overdraft fees collected by TheFed would drop accordingly and you would know where your money is, unless the Federal Government started printing more money.
Remember, even Rothschild quipped “Give me control of a nation’s currency and I care not who makes the laws”.
Perhaps voting begins with a dollar bill and you vote ever time you spend or chose not to spend.

[...] Pethokoukis explains why even the White House’s recent revision to it’s deficit forecasts still doesn’t… The White House says the federal government will run a $9 trillion budget deficit over the next [...]

[...] mit über 11% des Bruttoinlandsproduktes veranschlagt. Es wurde ebenso hochgerechnet, dass die Staatsschulden im Jahre 2019 68% des Bruttoinlandsproduktes betragen werden. Unser Kurs ist absolut unhaltbar, falls sich nichts [...]

[...] year, the federal deficit will exceed 11 percent of the gross domestic product — higher than at any point in the country’s post-war history. Last month, both the [...]

How long can we continue with this kind of debt? Will there be any economic consequence for the average american citizen??

Several reasons or “justifications” were offered to initiate the post 9/11 war against first Afghanistan, then Iraq: the Administration with the assistance of Philip Zelikow, who chaired:”The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks” which omits the World Trade Center in its title and loads a justification for war, this same Philip Zelikow is the architect of the war.
One hundred percent of reported commercial aircraft incidents prior to 911 requiring Military intercept were intercepted. Usually military jet intercept takes about 10 minutes – no intercepts occurred on the morning of 11 September 2001. Building 7 of the WTC housed investigations on Bear Sterns and other Wall Street firms, it fell similar to Tower 1 and 2 but was not hit by aircraft. Within the rubble, core columns were diagonally cut as photo evidence shows in a manner similar to demolition by professionals. NAFTA, during the Clinton Administration and Gore (of Cap ‘n Trade and the Green Police who can make your living in your own house a crime) exported much of manufacturing in the US due to labor cost differentials.
So, is this a marketing move by the Defense Industry or is as some have argued, a retaliation against Iraq for attempting to market Oil in “Euros”, away from the US dollar?
Both wars also strategically place US military in the OIL geopolitical region under whatever justification.
Let’s assume the debt moves forward to collapse the US currency, as those who see that comming move to commodities and elsewhere, then the US dollar collapse represents a buying opportunity.
Comments anyone?