Podcast: The Deficit, Debt, and Interest

September 22, 2009

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Download the mp3 of this podcast (5:45)

In this podcast we will discuss the basics of government deficits, debt, and interest. I’m Michelle Bazie and I’m joined by the Center’s Director of Federal Fiscal Policy, Jim Horney.

1. Jim, the nation’s budget deficit hit a record $1.6 trillion this year alone. By no means is this a trivial number. Can you explain what the deficit is and why it’s so large?

 The federal budget deficit is essentially the difference between what the federal government spends in any fiscal year…spends on things like education, social security, defense, everything else the federal government does…the difference between that and the revenues it takes in. Any time the spending exceeds the revenues, the federal government runs a deficit.

The biggest single reason why we have such a large deficit this year is the really bad economic downturn. The recession that we’re in right now is the worst since World War II and anytime there’s a recession, federal revenues go down, spending goes up for things like unemployment insurance and particularly this year because of the depth of the recession the federal government enacted legislation that is intended and is helping to stimulate the economy shore up the financial system but those efforts are adding to the deficit this year.

2. So if the government spends more than it collects in a given year, how does it pay for the difference?

Whenever the government spends more than it takes in in revenues it has to borrow in order to make up that difference. A lot of people think that the federal government simply prints money but that doesn’t happen. It borrows the money instead from citizens, banks, other institutions in the United States, and abroad.

3. The national debt is another term we hear all too often. Can you explain the relationship between deficits and debt?

As I said earlier, the deficit is the amount that the federal government has to borrow in any single year to cover the excess of spending over revenues in that year. The debt held by the public is the cumulative effect of all of that borrowing. Whenever the federal government runs a deficit it has to borrow more, that adds to the debt held by the public. If we ever run a surplus which we did for 4 years in 1998 through 2001 we actually can reduce the debt. Now the debt held by the public right now totals about 7.6 trillion dollars. There is another measure of the debt, called the gross debt, that is considerably larger than that which counts not only the amount that the federal government has borrowed from citizens, banks, other institutions in this country, and from foreign entities to cover the deficits, but also the money that the government in a sense has borrowed from itself such as the social security trust fund surpluses which are invested in government securities. Economists agree that the debt held by the public is the more important measure of the debt.

4. One other thing that we hear about is interest on the debt. How is that related to the debt held by the public?

 Just like any family or business that borrows money the federal government has to pay interest to the lender on the money that we have borrowed. Last year the interest on the debt held by the public totaled about $250 billion. That’s roughly as much as the federal government spent on education, transportation, and veterans programs combined.

Every dollar the government spends on interest payments is a dollar that’s unavailable for programs that currently benefit taxpayers. Basically, interest is what we pay now for benefits received in the past that weren’t covered by tax receipts.

5. So now we understand, deficits, and the debt, and interest on the debt. What are our next steps? What should we be doing?

 We have to be very careful that we don’t try to reduce the deficits in the next few years because if we did we might undercut all of the efforts we’ve been taking to get the economy growing again. But for years beyond the next few, we should begin as soon as possible to take the steps that are necessary to get future deficits…that is, deficits in coming decades, down to sustainable levels which economists generally agree would be deficits that are no more than about 2.5 to 3 percent of the size of the economy. Right now under current policies, or even under the policies proposed by President Obama, we’re looking at deficits that toward the end of the next 10 years that would be about double that sustainable level. In the decades beyond that we’re looking at deficits that would be much, much larger than that level that’s sustainable. That means we got a heavy load ahead of us to get the deficits down to those levels that we can live with.

Thank you for joining me, Jim.

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