America’s financial situation is unsustainable. In 2009 the federal government spent $3.5 trillion but collected only $2.1 trillion in revenue. The result was a $1.4 trillion deficit, up from $458 billion in 2008. That’s 10 percent of gross domestic product, a level unseen since World War II. Worse, the Congressional Budget Office (CBO) projects that we’ll be drowning in red ink for the foreseeable future, with annual deficits averaging $1 trillion during the next decade.
While these figures are dramatic, they pale in comparison to what the federal government owes foreign and domestic investors. According to the CBO, in 2009 America’s public debt reached $7.5 trillion, or 53 percent of GDP, the highest it has been in 50 years. In 2010 the debt will cross the 60 percent threshold, a level at which many economists believe a country is putting itself in financial peril.
And the situation is deteriorating rapidly. Figure 1 compares the CBO’s long-term public debt projections from 2010 with long-term projections calculated in 2007. Three years ago, the CBO projected that the debt held by the public would not surpass 60 percent until 2023.
What’s more, with the impending entitlement crisis requiring more future borrowing, the national debt could grow faster than the economy. In 2020, if current trends continue, the country will owe more than $20 trillion, or 85 percent of GDP. There are six reasons why these deficits matter.
First, debt is very expensive. The more we borrow, the higher the cost of borrowing. By 2020 the federal government will spend a projected $900 billion each year just to pay interest on our debt. That’s more than what the U.S. spends right now on two wars, plus the Departments of Defense, Education, Energy, and Homeland Security combined.