Budgets, Debts and Deficits — Oh My!February 6th, 2010 by Lee Eldridge
People are beginning to think I’m obsessed. “What’s the big deal about these deficits?” they ask. One person mentioned that even though the projected deficit is $1.56 trillion this year, it’s supposed to go down to $1.3 trillion next year. So I guess it’s time to explain why all of this is such a big deal.
Deficits vs Debt
I think this is the primary area where people get confused. People think these two terms mean the same thing. Or accidentally use these words interchangeably. But they are very different. The deficit is the one year snapshot of how much more our government spends than it receives. The converse would be a surplus which doesn’t appear to be a problem in the foreseeable future. The debt is like the ongoing scorecard of our deficits and surpluses.
Example: You make $40,000 this year. You spend $50,000 this year. You have a deficit of $10,000. Doesn’t sound that bad. But do that for ten years straight, and you now have debt of $100,000, plus interest (servicing the debt).
So saying that the deficit next year is going down to $1.3 trillion, still means we’re adding another $1.3 trillion to our debt.
Budgets and Deficits
The president puts together a proposed budget for the federal government, and passes it along to Congress. But it’s really Congress that has the power at this point. The Congress decides how much to spend, and where to spend it. Sometimes they pretty much do what the president has asked. And sometimes they ignore the president’s proposed budget and do what they want. Of course they also typically pass new spending bills throughout the year that were not included in their original budget.
Our government also has to project how much money they will receive through tax revenues — the lifeblood of government. The difference between revenues and expenditures is either a surplus or a deficit. These numbers are still just projections at this point. It’s not until the following year that we know for sure how much was spent, and how much was collected.
Guns and Butter
The old debate in government spending was how much to spend on guns (national defense) and how much to spend on butter (domestic programs). But as our debt grows, so does the amount of money it takes to service the debt. The more money we spend servicing our debt, the less money we have for guns AND butter.
Example: Many of us have gotten over our heads in credit card debt. I’ve done it twice in my life. You think I would have learned the first time. You reach the point where you’re barely able to make the minimum payments, and you realize that all you’re really doing is paying the interest, and not paying down the debt.
The dollars that will soon be required for servicing our national debt are staggering. A significant portion of our tax money is already spent servicing our debt. Not on guns. Not on butter. And not on paying down the debt.
Did You Know?
Did you know that our national debt is more than $12.3 trillion and growing?
Did you know that we have run federal deficits every year since 1969 except for four? See this report from the CBO. The four years of surpluses were from 1998-2001.
Did you know that are government’s “plan” is to grow our debt by another $1.56 trillion this year?
Did you know that in 2009, the Treasury Department spent $383 billion of our money on interest payments on our national debt? Compare that to how much is spent on other items such as NASA ($19 billion), education ($53 billion) and the Department of Transportation ($73 billion).
Large deficits and debts are the enemy to a robust economy. Want to fix the economy? Washington needs to get its own house in order. And economic prosperity has a chance to return.