As of June 7, 2016, the U.S. national debt stood at $19.279 trillion, which is 101% of our nation’s gross domestic product (GDP). This is more than double the national debt from 10 years ago, when it was 61% of GDP. However, when broader measures of debt are included, such as entitlement payments and government pensions, the actual debt load rises to a staggering 288% of GDP. The good news is that the rate of growth in national debt is slowing. The bad news is, even with a slowing growth rate, federal budget experts suggest that the high national debt may not be sustainable without significant reductions in government spending and an increase in tax revenues, a feat not likely to happen anytime soon with a polarized U.S. Congress. Under current circumstances, the national debt will soar to more than $30 trillion in 2026.
How the National Debt Grew So Large
The increase in national debt comes from the government spending more than it takes in, which creates a fiscal deficit in the year when it occurs. The fiscal deficit is added to the national debt every year. A surplus would reduce the national debt, but the government has not generated one since 1998 through 2001. The rapid increase in the national debt can be traced back to 1974, when it grew at an average annual rate of 10.9% through 1978. In 1980, when annual deficits spiked sharply, the rate of growth was 13.4% through 1990. These periods followed the decoupling of the dollar from the gold standard by President Richard Nixon in 1971. Since dollars were no longer redeemable in gold, and were backed by the full faith and credit of the U.S. government, there was no limit on what Congress could spend.
That newfound freedom ushered in the era of pork spending, in which politicians could add pet projects to bills to benefit people in their districts or states. These earmarks add billions of dollars to the budget each year. Although Congress imposes debt limits each year, a budget deal between Congress and the administration effectively removed them in 2015, allowing the government to borrow as much as it needs.
In 1974, the fiscal deficit was $6.1 billion. By 1983, it mushroomed to $207 billion. Following the surpluses in 1998 to 2001, the deficits grew under President George W. Bush, reaching $459 billion in 2008. In President Barack Obama’s first year of office, the deficit ballooned to $1.4 trillion, due in large part to the stimulus package he enacted during the Great Recession. After four years of trillion-dollar deficits, the combination of a recovering economy, higher taxes and reduced government spending cut the deficit in half. In 2015, the deficit was $438 billion, and the projected 2016 deficit is $500 billion. Although that is a big improvement, the current deficit level is projected to add around $1 trillion to the national debt every two years.
Deficits Are Going to Increase From Here
Since 2007, the federal government has benefited from near-zero interest rates, which came about through its quantitative easing programs in the wake of the financial crisis. However, as the interest rates rise, the cost of maintaining the debt will increase. Interest on debt is projected to overtake military spending by 2021, which will require major cuts in domestic spending to avoid a dramatic debt increase. Over the next 10 years, interest on debt, Social Security and federal health care programs such as Medicare, Medicaid and Obamacare are expected to account for 83% of the projected increase in spending, driving the federal deficit back up to the trillion-dollar level.
Short of drastic changes in the way Congress and the administration approaches the federal budget, the national debt is expected to continue on its current trajectory. The Congressional Budget Office (CBO) says we can maintain the current debt-to-GDP level by either raising taxes or cutting spending, or a combination of both, by 1.1% of GDP if it is done today, or 1.9% if it is not done in the next 10 years. In the current political environment, in which neither side has an appetite for compromise, it is more likely to get done later rather than sooner.