The Truth About the U.S. Budget Problems

Arif Ali/AFP/Getty Images

Arif Ali/AFP/Getty Images

Good news on the budget deficit appears to be somewhat clashing. According to the U.S. Department of the Treasury, the deficit in Fiscal Year (FY) 2014 was down to $197 billion below FY 2013’s deficit at $483 billion. “As a percentage of Gross Domestic Product (GDP), the deficit fell to 2.8% … the lowest level since 2007 and less than the average of the last 40 years. In dollar terms, the FY 2014 deficit is the lowest since 2008,” reads the October report — which is when the federal government finishes out its fiscal year. Obama also mentioned debt improvement in his State of the Union Address, saying “We’ve seen the fastest economic growth in over a decade, our deficits cut by two-thirds, a stock market that has doubled, and health care inflation t its lowest rate in 50 years.” This statement was backed by Treasury Secretary Jacob J. Lew almost to the word, in a statement.

Even Republicans admit that the national deficit level is at a better place now than it has been in the past, even if they see issues with the outcome. “Look, things are getting better,” admitted House Majority Leader John Boehner, going on to discuss how the middle class and poor of America have failed to benefit in an interview with CBS news. In the same interview, Sen. Mitch McConnell (R-Ky.) took a more offensive tact, saying, “We added more debt during the Obama years than all the presidents from George Washington down to George Bush.” Later, Boehner added to this, saying that President Barack Obama “never got serious about doing the kind of reform that would put America’s fiscal health in proper shape,” according to Politico.

So exactly who is right in all of this? The answer is, to an extent, both sides of the argument. It depends on what numbers are being compared, over what period of time. Is inflation being considered? If the deficit rises one year a great deal, but lower than average the year before, the combined average can be positive, it’s all in the way the numbers are considered. Noticeably, Obama refers to the last decade when discussing the deficit, while McConnell compares a completely different measurement. With all the different rhetoric flying around, there are a few details worth understanding about the deficit and how numbers are reported and money is utilized by the government. There are also a couple concerns worth pointing out, beyond simply the amount of the deficit at present. 1The WSJ pointed out recently that borrowed funds do not amount to the same thing as funds in deficit. So for example, the U.S. borrowed $668 billion in 2014, but only reported a deficit of $488 billion. This is because not all of that money was spent and the value of the dollar increased. It’s also further complicated by the fact that some of the money is given back out in the form of loans, meaning it returns — with a certain degree of risk — and returns with interest. The national deficit also needs to be considered in proportion to the rest of the U.S. economy (see graph above and below for comparison).

2Deficit, to an extent, is to be expected, even desired to a certain degree. The nation does not want a completely empty debt load, but it does need to be in balance. There are also a number of potential negatives with America’s deficit.

This year’s deficit has fallen compared to last year’s. While the 2014 budget results “show significant and continued progress in reducing the deficit,” according to the joint statement from Treasury Secretary Lew and Office of Management and Budget Director Shaun Donovan, it’s projected to increase based on Obama’s budget for 2015 by $165 billion, according to that same statement. This is described as part of an effort to “stabilize debt as a share of the economy by 2015 and put it on a declining path after that.”

The interest rate of America’s debt also has the potential to rise in coming years. Currently it’s holding near 0% interest rate, as intended by the Federal Reserve, but it won’t remain that way forever. Which could throw off the current path and create a whole other consideration. Though given that these changes would happen gradually, and hardly come as a shock, that concern can be downgraded somewhat. The Congressional Budget Office has stated that the three-month interest rate is likely to rise to an average of 3.4% between 2018 and 2024, with the 10-year Treasury average at 4.7%. Ultimately, the easiest answer to whether budget issues are underrated probably finds its answer somewhere between the optimism of President Obama, and the pessimism of members of the GOP.

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