What Unsustainable Looks Like

March 5, 2010 06:20

By Veronique de Rugy Wednesday, March 3, 2010 via The American

President Obama’s freeze of the non-defense, non-homeland security side of the budget will do nothing to get us on the path of fiscal responsibility. Here’s why.

When the federal government spends more than it collects in revenue, it runs a deficit. To fill the gap, the Treasury Department must borrow. As our debt grows, the interest payment on that debt is growing, too. If we do not change the course we are on, debt will end up as our biggest budget item. Indeed, the cost of the debt as a percentage of gross domestic product will explode from a mere 1.8 percent of GDP in 2012 to more than 30 percent of GDP in 2082.

Today, everyone agrees that this path is unsustainable. According to the Congressional Budget Office (CBO), in fiscal year 2010, the gross federal debt will amount to $13.2 trillion. This gross federal debt is comprised of the debt held by the public ($8.8 trillion) plus the debt held by intra-governmental accounts ($4.5 trillion), such as the money paid by taxpayers for Social Security and Medicare. Together, this gross federal debt represents over 90 percent of U.S. GDP. The debt held by the public represents 60 percent of GDP, a stark contrast with its 36.5 percent of GDP in fiscal year 2007 (see table F-11 here).

However, what isn’t visible in this data—and, hence, obscuring much of the public debate about our financial outlook—is the long-term trend of entitlements, particularly of Medicare and Medicaid. This chart based on CBO data illustrates that point.

deRugy 3.3.2010

In 2010, Medicare and Medicaid cost 5.0 percent of GDP and Social Security cost 4.8 percent of GDP. Combined, that’s less than 10 percent of GDP. By 2020, the combined cost of these three programs is already projected to grow to 11.4 percent of GDP; extrapolating forward at constant growth rates, their cost will be at about 14.4 percent of GDP by 2030.

This is why President Obama’s recently announced freeze of the non-defense, non-homeland security side of the budget will do nothing to get us back on the path of fiscal responsibility. As you can see on this chart, even if we stopped spending money on discretionary spending, we would still be facing a serious fiscal crisis.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.

FURTHER READING: De Rugy regularly illustrates the follies of government spending for THE AMERICAN. She recently explained “The Limits of Blaming Bush,” decried “President Obama’s Binge Diet,” and outlined “The High Cost of No Price” for healthcare. She has inspected “The State of the Stimulus” and answered “So How Is the Stimulus Working Out?” part I and part II.

Help Make A Difference By Sharing These Articles On Facebook, Twitter And Elsewhere: