Bajtelsmit Column: Staggering Federal Debt

Note to Editors: Vickie Bajtelsmit is a finance professor in the Colorado State University College of Business and the author of three personal finance books.

Financial planners counsel their clients to avoid spending beyond their means.  An annual budget deficit-spending  more than your income–results in increasing total household debt. This financial strategy is not sustainable over the long term, a fact that is quite clear in the current credit crunch.  

So why doesn’t the federal government follow the same rules? Recent forecasts show a huge federal government budget deficit-expenses will exceed tax inflows by a staggering projected $482 billion.  And it’s likely to be even greater than estimated because the White House incorporated relatively rosy projections for inflation and unemployment and included only $70 billion in war spending, a vast underestimate according to many experts. Nor does it include the costs of the new housing bill that Congress recently approved.

The federal deficit is a number with so many zeros that it’s hard to really imagine it.  Add that to the $9.5 trillion in debt we’ve already accumulated and it’s more than $31,000 owed per person in the United States. Although the stated causes for the increasing debt are war costs, tax rebates, and a slowing economy, the real reason is quite simple: over the course of the Bush Administration, the federal government has consistently spent more than it earned.  

But that’s not the worst of it.  The budget deficit and total debt are commonly reported using a cash basis form of government accounting that doesn’t take Social Security and Medicare promises into account. It turns out that if we count the present value of those future government obligations, the same as we make corporations account for their long term benefit obligations to employees, the total federal debt on an accrual basis is more like $56 trillion, or $186,000 per person.

By the way, don’t pay any attention to government forecasts of declining deficits and total debt in the near term future. Those projections by the Congressional Budget Office assume that all the Bush tax cuts go away. Neither Obama nor McCain have supported that idea.  

The federal government borrows money by issuing Treasury bills, notes, and bonds. These financial securities require payment of interest to the investors. The annual interest expense alone paid on the national debt, about $500 billion for 2008, is much greater than the amount spent on the wars in Iraq and Afghanistan.

Although it’s tempting to fault President Bush and Congress for the current situation, we can’t really blame anyone but ourselves. We’re the ones who elect our political representatives and tell them that we don’t like budget cuts or tax increases.

So you may as well buy a bumper sticker that says: "I’m spending my children’s inheritance." The uncontrolled spending of today leaves a legacy to the next generation that will require higher taxes, reduced government services, and probable Social Security and Medicare cutbacks. More subtle effects of a large government debt include reduced confidence in the US dollar and increasing interest rates as the government demand for borrowing crowds out other borrowers.

Given this starting point, is it even remotely possible for Obama or McCain to fulfill their campaign promises? Both candidates are touting lower taxes, improved health care,  and additional support for the military, but both are similarly vague on the fiscal details. Obama claims he will increase taxes on the rich.  McCain intends to balance the budget by reducing wasteful spending and overhauling Social Security and Medicare.  

I have my doubts. Absent a significant change in voters’ attitudes, I’ll bet we’re in for more of the same. The best a new president can hope for is a strengthening economy, so that increased tax revenue can help hide the lack of budget discipline.