U.S. debt hits $7.4 trillion ceiling
WASHINGTON – Regardless of who wins Tuesday’s election, Congress will return to the capital a few days later and pass legislation allowing the Treasury to accommodate the largest national debt in history.
As predicted by the Treasury Department in August, government liabilities hit the $7.4 trillion federal debt ceiling earlier this month. The department took last-resort accounting measures to ensure bonds and other securities are repaid on time without breaking the law, but Treasury representatives say spending can stay below the limit only until mid-November.
“We will work with Congress on the actual figure,” said Rob Nichols, the department’s head spokesman. The constantly rising national debt now is just over $7.4 trillion and the ceiling increase will reflect the potential for it to grow larger in coming years.
If Americans were asked to pay off the debt today, the government’s debts to investors and intra-government accounts would require everyone in the country to mail a check for about $25,000.
In the short run, debt of that magnitude can allow the government to inject money into a slouching economy, and its impact on individuals can be positive if noticeable at all. However, economists warn that sustained national debt can damage the economy by driving up interest rates, spurring inflation and making foreign investors reluctant to invest in the United States.
“It’s something they haven’t brought up,” Alice Rivlin of the Brookings Institution said regarding Congress. “There is no overall plan.”
Rivlin – a former director of budget offices for both Congress and the White House – is among the economists who predict that the national deficit will rise to unsustainable levels in coming decades unless legislators act soon.
Paying off today’s debt in 20 years without changing current spending levels would require the government to take in over 43 percent more revenue than it did this year, or about an extra $2 billion per day. Realistically, the government will have to enact some combination of spending cuts, increased taxes and an overhaul of entitlement programs such as Social Security, Medicare and Medicaid, which account for 40 percent of U.S. spending.
Most congressional campaigns in Washington and other states mention the debt as a serious issue, often while lambasting an opponent’s spending policies. But rarely have they offered concrete suggestions to change Social Security or restructure government programs.
“I don’t think either party in their congressional candidates is pushing a viable plan to reduce the debt,” said Robert Bixby, executive director of the Concord Coalition, a think tank that advocates for a balanced budget.
“That means not voting for massive tax cuts for the wealthy,” said Sen. Patty Murray’s spokeswoman Alex Glass, who added that the Washington Democrat also supported unsuccessful pay-as-you-go measures for congressional spending and tax cuts. In speeches and press releases over the past months, she cites President Bush’s tax cuts and occasionally the war in Iraq as prime culprits for deficit spending.
However, Rivlin said repealing some or all of the tax cuts would only partly reduce the debt. As for the war in Iraq, the Congressional Research Service reported about $72 billion was earmarked for military operations and reconstruction in Iraq in 2004. That is about 17 percent of the record-breaking $422 billion budget deficit for the year.
Washington’s Rep. George Nethercutt, who is running against Murray, has supported bills similar to those introduced by Idaho’s senators that would amend the Constitution to require a balanced budget.
Both Nethercutt and Murray sat on appropriations committees that crafted next year’s budget, which is estimated to outstrip federal revenue by $348 billion.
“Even with a strong economy we’re stuck with a very large deficit,” Bixby said. “That’s something we can’t afford in the long term.”
President Bush, speaking with Nethercutt at a June reception in Spokane, said his administration would keep tax cuts in place and also reduce the deficit by half in five years. However, some economists are critical of sunset provisions in many of the tax measures that allow the plan to meet that goal. In the long run, they say, the president’s policies could erode government revenue and introduce even larger budget shortfalls in the future.
“Over time, the lost revenue from the tax cuts escalates a lot,” Rivlin said.
In his speech, Bush said another legislative goal that would reduce the debt is capping payouts for medical liability suits. The Congressional Budget Office found in a recent study that such legislation could reduce doctors’ insurance premiums by 25 percent to 30 percent. However, malpractice costs make up only 2 percent of overall health care spending, so the reduction would only reduce health care costs by about one-half of 1 percent.
The national debt as compared to the gross domestic product – a rough measure of how much the country produces in a year – is significantly less than its peak at the end of World War II. Of the $7.4 trillion debt, about $4.3 trillion is publicly held debt, with the rest borrowed from government trust funds that generate surpluses and interest. Publicly held debt is about 37 percent of the current GDP – well below the 109 percent high-water mark reached in 1946 or even levels in the 1990s.
However, Bixby said the debt is as significant as it was 12 years ago when it was discussed more often in political campaigns.
“The historical context is very different because the baby boomers are about to retire,” he said.
Predictions by government agencies indicate that Social Security payments will push the debt past the post-war record in coming decades when the program will no longer take in more money than it doles out.
“Nobody thinks that’s actually going to happen,” Bixby said. At some point legislators will take steps to address the debt, but Bixby said it may take some kind of economic crisis to motivate them.
“It’s a lot like health habits,” he said, likening government to someone who continues to smoke or eat poorly after repeated warnings from a doctor, only changing habits after the illness becomes life-threatening.
In the meantime, legislators will face climbing program costs and a growing number of warnings from agencies like the GAO, which recently described the current fiscal policy as unsustainable.
“If we don’t take steps now, future presidents, Congresses and taxpayers will have a bigger problem to deal with down the road,” Bixby said.