METHODS

Often times when the topic of the federal budget deficit is discussed in the media, it is discussed referring to the U.S. Treasury numbers. That is legitimate since congress determines fiscal policy using those numbers. And, when planning future budgets, the congress uses the projections drawn up by the Congressional Budget Office (CBO) using a set of assumptions regarding future events. However, this method of planning is troublesome because the U.S. Treasury doesn't include borrowing activities from all government agencies. Furthermore, the U.S. Treasury combines the Social Security and Medicare Trust Fund surpluses into the federal budget in effect watering down the real deficit numbers. Instead, it is preferable to use the Federal Reserve Flow of Funds Report. Particularly the report that shows how much the federal government and all of its agencies borrow from the credit markets to finance their obligations. In other words, the Federal Reserve Flow shows the real federal deficit. IN the graph below, the U.S. government securities line gives the real numbers on how much the U.S. government borrowed in new money from the credit markets. These numbers show the real borrowing activity without the trust fund surpluses and selective accounting blurring the numbers. For instance, our real deficit for 2003 was 969 billion dollars, not the propped up number of 500 billion dollars you hear so often. And, these numbers add to the national debt because it is money our government and government agencies have to pay back with taxpayer money in effect portraying the real federal deficit.

 

Credit Market Borrowing, All Sectors, by Instrument Billions of dollars; quarterly figures are seasonally adjusted annual rates

	1999	2000	2001	2002	2003	Q3 2002	Q4 2002	Q1 2003	Q2 2003	Q3 2003	Q4 2003
Total	2108	1724.5	2021.6	2290.4	2703.5	2062.9	2702.3	2505.3	3170	2577.3	2555.8
Open market paper	229.9	211.6	-147.8	-91.5	-81.6	19.2	-59.8	44.1	-76	-81.6	-212.7
U.S. government securities	520.7	137.6	623.8	811.5	969	687.1	847.7	643.1	1194.9	1088.4	949.6
Municipal securities	54.4	23.6	122.9	159.4	136.3	160	215.4	103.5	193.7	112.1	135.8
Corporate and foreign bonds	426.1	379.5	626.2	495.8	650.6	170.9	707.7	750.8	657.4	481.1	713.3
Bank loans n.e.c.	69	112.8	-76.2	-80.6	-94.4	-41.7	-134.9	-122.4	-59.3	-86.5	-109.3
Other loans and advances	127.5	125.6	36.7	33.1	19.4	92.8	14.1	84.6	12.9	-60.7	40.9
Mortgages	568.4	568.6	698.4	881.3	1002.5	894.7	1085.9	919.8	1127.3	1002.7	960.3
Consumer credit	112.1	165.2	137.7	81.4	101.6	79.9	26.2	82	119.2	121.6	77.9
Total net issues	192.7	240.3	300.4	229.7	396	-54.6	289	287.7	440.8	415.1	440.4
Corporate equities	1.5	5.3	99	47	107.8	-120.3	87.8	112.1	107.5	127.8	83.6
Nonfinancial	-110.4	-118.2	-47.4	-41.6	-49.1	-140.8	-30.5	-67	-50.2	-44.9	-34.2
Foreign shares purchased by
U.S. residents	114.3	106.7	109.1	17.7	85.8	-51.3	51.6	137.5	67.6	120.2	17.7
Financial	-2.4	16.8	37.3	70.9	71.1	71.8	66.7	41.6	90.1	52.5	100.1
Mutual fund shares	356.2	356.1	356	356.1	356.2	356.3	356.4	356.5	356.6	356.7	356.8

 

To give the Federal Reserve numbers credibility, you need to realize that our national debt grew even through the years when the federal government was supposedly running surpluses “farther than the eye can see”. How could this be with all these surpluses we had? The answer is: We never had a budget surplus if you considered the real numbers. In 1999, the federal government borrowed 520 billion dollars to finance their obligations. This is no surplus. In 2000, the federal government borrowed another 137 billion dollars. The picture was improving, but again, the government had to borrow to meet their obligations. Then borrowing grew rapidly in 2001 – 2003.

2003	6,783,231,062,743.62
2002	6,228,235,965,597.16
2001	5,807,463,412,200.06
2000	5,674,178,209,886.86
1999	5,656,270,901,615.43
1998	5,526,193,008,897.62
1997	5,413,146,011,397.34
1996	5,224,810,939,135.73
1995	4,973,982,900,709.39
1994	4,692,749,910,013.32
1993	4,411,488,883,139.38
1992	4,064,620,655,521.66
1991	3,665,303,351,697.03
1990	3,233,313,451,777.25
1989	2,857,430,960,187.32
1988	2,602,337,712,041.16
1987	2,350,276,890,953.00

 

Looking at figure to the right, you can see that the national debt continued to grow as our borrowing continued. According to the Bureau of Public Debt our deficit stands at 7,123,463,144,525.77 trillion dollars as of this writing. From 2001 – 2003, our national debt increased by close to two trillion dollars. This is daunting debt growth considering our economy is currently at 11,252 trillion dollars according to the U.S. Treasury. So, the Federal Reserve numbers seem more reliable and tell a better story as to why our national debt keeps growing even when the U.S. Treasury reports surpluses in the federal budget.

To understand how these numbers relate to the economy, let's take a close look. Using the GDP numbers from the Bureau of Economic Analysis, our GDP grew at an annualized rate of 4.1% in the fourth quarter of 2003 and currently stands at 11,252 trillion dollars. Let's see how the debt numbers stack up as a percentage of GDP :

 

• Our National Debt is 63% of GDP
• The federal government borrowed 969 billion dollars in 2003, which is 8.6% of GDP
• The federal government borrowed 811.5 billion dollars in 2002.
• From the US securities debt, the growth in borrowing activity from 2002 – 2003 was 16%
That is four times the annualized growth in GDP
• The debt service on our National Debt for fiscal year 2003 was $318,148,529,151.51, which is 2.8% of GDP
• The debt service so far in fiscal year 2004 is currently 143,194,459,003.36, which comes to 1.3% of GDP
• The growth in our National Debt from fiscal year 2003 up until this writing is 4.7%.

 

What these numbers prove is that we are growing our economy by growing our debt. The national debt grew faster than the GDP just in the five months of this fiscal year as pointed out in item 6 above. The numbers are more daunting when you calculate the growth in the national debt from 2002 to 2003. That number is 8.1%. You keep hearing economists saying that 4% growth in GDP is a great number. Maybe in a historical perspective it is, but that figure has to be adjusted to overcome our growth in the national debt. If we are growing our debt at an 8% clip, the GDP will have to grow just as briskly for the federal government to start paying down the debt. Currently, we are growing our debt at a rate of 4.7% this fiscal year. Let's hope the next GDP number we hear from the BEA is better than 5% to at least keep pace. To put these numbers into perspective: Close to 67% of our economy is in debt if you add in the interest costs to service the debt. The third largest spending program in the federal budget is the interest cost of the debt behind social security and defense spending. In simple terms, the growth in federal budget deficits increases our national debt. As the national debt increases, so do the interest payments. Over time, this leads to the erosion of our economy. .

In the short term, these numbers may not mean much. The economy can still grow at a good pace even if the debt grows. However, in the long term, if we continue on the path our federal government is currently on, we will pass on a tremendous burden of debt to the next generation, damage the economy, and crowd out spending to meet the needs of our citizens. In fact, recently Jack Snow -- The U.S. Treasury Secretary -- has come out to tell the American people that Medicare will run out of funds by 2019. And, that Social Security is in trouble sooner than projected. This falls in line with the comments Alan Greenspan recently made to congress. The Federal Reserve Chairman hinted to congress recently that if deficits keep growing at the current pace, cuts in benefits in our Social Security and Medicare programs would have to be made or the retirement age to qualify for these benefits will have to be raised. So, these statements are signs that the federal budget deficits are becoming a problem by crowding out entitlement spending. Furthermore, large federal deficits can affect interest rates causing damage to our economy. According to Robert Rubin, while addressing the Concord Coalition, – A nonpartisan coalition that advocates fiscal responsibility – that as the economy grows stronger and the demand for capital rises in the private capital markets, the increased demand will collide with the large deficits – which reduces the pool of savings due to federal borrowing in the capital markets -- forcing interest rates to increase. The interest rates could go up substantially if the private capital markets fear that fiscal instability will continue into the future. As a result, business confidence and consumer confidence will suffer. In short, we are on a destructive path and our leaders are going to have to make tough choices to reverse this trend. As the debate for fiscal responsibility takes shape, the CBO warned back in December of 2003 that substantial cuts in spending or sizeable tax increases -- or both -- will be necessary to achieve fiscal stability.

 

What can we expect in the future? The future is definitely uncertain in an election year. Since both parties are currently debating this issue in congress, hopefully there is a successful compromise. The plan the Republicans want to implement to pay down the national debt is as follows: The Republicans will not raise taxes but will rely on economic growth and cuts in spending programs to reduce the deficit initially. Members of the Concord Coalition believe this plan could work but the spending commitments made for Homeland Security, Iraq, The War on Terror, and the Medicare bill recently passed will be hard to overcome and will have to rely on increasing taxes eventually. The Democrats plan for debt reduction is to increase taxes on the top 1% to 5% of the wealthy. The Concord Coalition believes that the plan would put the federal budget on the right path but wouldn't solve the deficit problem completely. They feel that the Democrats would use the revenue for other spending programs instead of paying down the debt. In the end, the effects of real federal deficits and the national debt will force the congress to approach this problem before the economy falls into crisis. As baby-boomers start retiring, an economic crisis could happen if the federal deficits are still high and reliance on entitlements are increasing. So, no matter what numbers are used when interpreting the federal budget deficit, it is clear that a solution to the growth in the federal budget deficits and the national debt should be approached aggressively today to avoid a crisis situation in the near future. Deficits do matter and as the saying goes, “The bill is now due”.