The Outsider’s Guide To The Federal Budget 2

Figure 3The Crisis Is Here Now
Federal debt as a percentage of GDP has reached historic peacetime highs not seen since the years shortly following World War II. Under conservative projections, the Congressional Budget Office (CBO) is estimating trillion dollar deficits by 2022. By 2026, our gross national debt will be approaching $30 trillion.

Figure 3, shows United States defense spending as a percentage of GDP.
The provision for a common defense is a Constitutional mandate but our dysfunctional funding process now threatens Congress’s ability to provide for our common defense.

As shown in Figure 3, spending as a percentage of GDP has consistently dropped since 1968. Our 30 year average for defense spending has been 4.2 percent of GDP. The 1 percent gap between our 30 year average and current spending is a $200 billion defense funding shortfall and this funding gap will only grow as projected defense spending steadily falls over the next decade.

For most of our nation’s history, the federal government and the American people it serves, both shared a common belief that the federal budget should be balanced. Similar to a family checkbook, the nation balanced its ledgers year after year. During normal times, the government issued debt only to pay for long-term investments such as the Louisiana Purchase. Only during times of war or economic depressions, was it viewed appropriate for the government to spend beyond its means.

The chart below, prepared by the CBO, shows the historical percentage debt to GDP level for the United States.

Figure 4

Each time after a period of government deficit spending, whether it was for the Civil War or the Panic of 1893, the government would run surpluses in subsequent years following to pay down the national debt. Over the past century, there has been a fundamental shift of norms. Our nation previously expected to spend within its means and resort to deficit spending only during extraordinary circumstances. Today, deficit spending is seen as the norm leading to the exponential growth in our national debt.

As seen in Figure 5, for the past eight years, we’ve been living in an artificially low interest environment. If interest rates were to return to their 50-year average of roughly 5 percent, we would be required to pay $1 trillion in yearly debt service based on current debt level of $19 trillion.

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