Out-of-control federal spending and debt are burdening current Americans and saddling future generations with a giant, unaffordable debt and an intrusive government. After remaining between 23 percent and 49 percent of GDP since the end of World War II, publicly held debt currently stands at nearly 70 percent of GDP and is projected to reach over 100 percent by 2021—well past the level that many economists believe harms economic growth.
Entitlement programs—Medicare, Medicaid, and Social Security—are the main drivers of America’s long-term spending problem and debt crisis. To solve our spending and debt crisis, Congress should cut current spending and restrict future spending through strong reforms that balance the budget. This must include entitlement reforms. Since this is a spending- and debt-driven crisis, taxes should not be part of the solution.
Generally, two figures are quoted for America’s federal debt: public debt (also called total national debt) and publicly held debt, which is total national debt minus intergovernmental borrowing like the Social Security trust fund. Publicly held debt was $10.1 trillion at the end of fiscal year (FY) 2011. Only two days after the debt ceiling deal in August 2011, the total national debt hit 100 percent of GDP, yet another indication that America’s debt is becoming unsustainable.
Congress is responsible for the national debt and limits the government’s authority to borrow from credit markets through the statutory debt limit. While the debt limit applies to the public debt, credit markets are concerned only with the debt that is sold to and traded in the markets (publicly held debt). In light of the nation’s fiscal plight, when the debt ceiling is reached, raising the statutory limit should be the last resort and should be accompanied by immediate, substantial spending reductions and other actions to set the nation on a path to reduced spending and borrowing.
When Moody’s threatened to downgrade the federal government’s bond rating, its message to Congress was clear: “to retain a stable outlook, [a credible long-term deficit reduction plan] should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.” Similarly, Standard & Poor’s downgraded the U.S. credit rating in August 2011, partially because of the woefully inadequate spending reductions in the debt ceiling deal.
Current debt projections are troubling enough, but the bigger problem is our long-term, unsustainable spending path. Driven by entitlement programs, federal debt will explode, reaching 185 percent of GDP by 2035 and continuing to climb.
- Cut spending immediately. Much of the spending that Congress should cut immediately falls into six major areas. Congress should focus on performing a few duties well and empower state and local governments to address local needs. Congress should consolidate duplicative programs and target other programs more precisely to end corporate welfare and enforce eligibility criteria. Outdated and ineffective programs should be eliminated, and other government functions better performed by the private sector should be privatized. And Congress should eliminate waste, fraud, and abuse.
- Reform Entitlement Programs. The cost of federal entitlement programs—Social Security, Medicare, and Medicaid—is a key driver of future deficits and debt. To ensure that they are fiscally sustainable, Congress should put entitlement programs on a firm, long-term budget of 30 years, with enforceable budget caps for Medicare, Medicaid, and Social Security and an obligation to adjust the programs as necessary to keep them within budget while also ensuring that low-income Americans are protected from poverty.
- Do not raise taxes. Long-term deficits are driven by soaring spending, not by sagging revenues. While government revenues are projected to return to their historical average level of 18.5 percent of GDP as the economy resumes growth, spending is projected to climb well in excess of 30 percent of GDP in the long term. Moreover, raising taxes at a time of high unemployment and depressed economic growth is the wrong strategy to get the economy back on track and Americans back to work.
- Balance the federal budget and keep it balanced. Americans have made it very clear to Washington over many decades that there are limits to how much they are willing to pay for government. Federal spending and revenue should be balanced at the historical average level of tax revenues to avoid deficits adding to national debt.
- Stabilize and reduce our debt. Publicly held debt was $10.1 trillion at the end of FY 2011, which is nearly 70 percent of GDP, and is on track to hit 185 percent of GDP by 2035. Congress must reduce and stabilize the debt-to-GDP ratio. Lower debt will remove the threat of financial crisis and restore the confidence of investors and lenders. It will also sharply reduce the debt burden on future generations, relieve the pressure on interest rates, and help to secure our prosperity.
- Sell government assets to help close deficits and lower debt levels. The federal government owns huge swaths of commercial land, power generation facilities, valuable parts of the electromagnetic spectrum, underused buildings, and financial assets. As an integral part of balancing the budget and reducing the national debt, the U.S. should conduct a program of asset sales and privatization.
Facts & Figures
- In the past, wars and the Great Depression contributed to rapid but temporary increases in the national debt. Over the next few decades, runaway spending on Medicare, Medicaid, and Social Security will drive the debt to unsustainable levels.
- Without significant spending reforms, publicly held debt is projected to reach 185 percent of GDP by 2035.
- Countries like Greece, Italy, and Portugal have suffered or are anticipating financial crises as a result of mounting debt. If the U.S. continues federal deficit spending on its current trajectory, it will face similar economic woes. Studies show that when the economy-to-debt ratio gets above 90 percent, the economy slows significantly.
- Every American generation has seen an increase in living standards, a precedent soon to be compromised by constrained economic conditions for younger Americans forced to repay our national debt. A staggering 77 percent of Americans ages 18–29 say they have delayed or will delay a major life change or purchase due to economic factors.
Selected Additional Resources
- David S. Addington, “Don’t Raise the Debt Limit Without Getting Spending Under Control,” Heritage Foundation Backgrounder No. 2549, August 21, 2011.
- William W. Beach and Robert Bluey, “Slay the Beast: How You Can Save Us from Our Massive Debt,” Heritage Foundation Special Report, revised and updated July 6, 2011.
- Stuart M. Butler, Alison Acosta Fraser, and William W. Beach, eds., Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity, Heritage Foundation Special Report No. 91, 2011.
- John Fleming, Emily Goff, and Kathryn Nix, “2011 Budget Chart Book”.
- J. D. Foster, “Congress Has Time and Options on Debt Limit,” Heritage Foundation Backgrounder No. 2511, January 27, 2011.
- Alison Acosta Fraser, “What Moody’s Really Told Boehner and Obama About the Debt Ceiling,” Heritage Foundation Foundry, July 15, 2011.
- Brian M. Riedl, “How to Cut $343 Billion from the Federal Budget,” Heritage Foundation Backgrounder No. 2483, October 28, 2010.