Section 5: Current and Future Policy Issues regarding Federal Debt

Figure 22: Composition of Federal Spending as a Share of GDP Assuming Discretionary
Spending Grows with GDP after 2004 and That Expiring Tax Provisions Are Extended
50 Percentage of GDP

Notes: Although expiring tax provisions are extended, revenue as a share of GDP increases through 2014 due to (1) real bracket creep, (2) more taxpayers becoming subject to the Alternative Minimum Tax, and (3) increased revenue from tax-deferred retirement accounts. After 2014, revenue as a share of GDP is held constant.

Under this scenario, borrowing to finance these obligations would add substantially to the national debt. Rising debt, in turn, raises spending on interest, which further swells the deficits, resulting in a vicious cycle. Budgetary flexibility is greatly reduced; massive spending cuts, tax increases, or some combination of the two would be necessary to obtain balance. Borrowing to finance these obligations is ultimately unsustainable because borrowing cannot in perpetuity grow at

Section 5: Current and Future Policy Issues regarding Federal Debt

a greater rate than the economy. At some point the economy will not produce enough resources to allow the government to service the debt. The government can help ease future fiscal burdens through spending reductions or revenue actions that reduce debt held by the public, saving for the future, and enhancing the pool of economic resources available for private investment and long-term growth. Economic growth can help, but we will not be able to simply grow our way out of the problem. Closing the current long-term fiscal gap would require sustained economic growth at levels so high as to be implausible. That is, closing the gap would require sustained economic growth far beyond that experienced in U.S. economic history since World War II. Tough choices are inevitable, and the sooner we act the better.

Does the debt limit provide a
way to control the amount we
borrow? What are some

alternatives to the debt limit?

A. The debt limit does not determine federal borrowing

needs. These needs result from all of the revenue and
spending decisions the government makes as well as the
performance of the economy. Whenever the government
approaches the debt limit, the Congress and the President
must eventually raise the limit to pay the government's bills as
they come due. Major increases in the debt limit accompanied
budget agreements in 1990, 1993, and 1997. The debt limit was
also raised in 1996, 2002, and 2003, each time after debt
approached the limit and the Treasury had to use its statutory
authorities available to avoid exceeding the limit. (See app. I
for GAO work on the debt limit.) CBO's January 2004 budget
projections showed that debt will reach the limit of
$7,384 billion during fiscal year 2004. (See fig. 23.) In July
2004, the Treasury estimated the debt limit would be reached
in late September or early October 2004. The Office of

Section 5

Current and Future Policy Issues regarding Federal Debt

Management and Budget's July 2004 budget projections show debt subject to the limit will be only $9 billion below the statutory limit as of September 30, 2004.1

Figure 23: Federal Debt Compared to Statutory Limit (End of Fiscal Years 1985-2005)

9 Trillions of dollars

8

7

6

5

4

3

2

1

2661

1905 1906 1901 1900 1900 1900 1901 1992 1993 1994 1995 1906 1991 1990 1990 2000 2001 2002 2003 2004 2003

1988

1989

End of fiscal year

2661

1661

Federal debt subject to limit

Projected federal debt subject to limit

Statutory debt limit

Sources: Office of Management and Budget and CBO.

'U.S. Office of Management and Budget, Fiscal Year 2005 Mid-Session Review (Washington, D.C.: July 2004).

Section 5: Current and Future Policy Issues regarding Federal Debt

Notes: Historical data from U.S. Office of Management and Budget, Budget of
the United States Government for Fiscal Year 2005 - Historical Tables
(Washington, D.C.: February 2004). Projections from U.S. Congressional
Budget Office, The Budget and Economic Outlook: Fiscal Years 2005 to 2014
(Washington, D.C.: January 2004). The debt limit represents a statutory ceiling
on the total outstanding amount of most types of federal debt. Generally, debt
issued by the Treasury to the public or to govemment accounts, as well as
obligations whose principal and interest are guaranteed by the U.S.
govemment, is subject to the limit. The statutory debt limit is changed through
legislation. This figure shows the debt limit at the end of the fiscal year. The
limit could be raised multiple times throughout the course of the fiscal year.

Some believe that debate over raising the debt limit may
provide an additional opportunity for the Congress and the
President to consider the implications of past and future fiscal
policy decisions for federal borrowing. However, limiting the
Treasury's ability to issue debt securities does not address the
broader scope of the government's fiscal policies or exposures,
nor does it promote predictability in the markets for Treasury
securities when Treasury seeks to borrow but is constrained by
the debt limit. (See below for a discussion of the nation's fiscal
exposures.) As policymakers explore budget process options,
some have suggested replacing the statutory limit on total debt
outstanding with a limit on debt held by the public or a limit on
federal debt as a share of GDP. Some countries have adopted
debt-to-GDP targets to guide fiscal policymaking; however,
there is no consensus on the optimal level of government debt
as a share of the economy.

Section 5: Current and Future Policy Issues regarding Federal Debt

Debt is one liability of the federal government. What are other potential ways to look at

exposures or implicit

commitments of the
government?

A. Debt held by the public is the largest explicit liability of

the federal government. However, the federal government undertakes a wide range of programs, responsibilities, and activities that may explicitly or implicitly expose it to future spending. These "fiscal exposures"2 vary widely as to source, extent of the government's legal obligation, likelihood of occurrence, and magnitude. Given this variety, it is useful to think of fiscal exposures as a spectrum extending from explicit liabilities to the implicit promises embedded in current policy or public expectations. (See table 2.) For example, the current liability figures for the U.S. government do not include the difference between scheduled and funded benefits in connection with the Social Security and Medicare programs.

2 GAO uses the fiscal exposure concept to provide a framework for considering long-term costs and spending uncertainties. U.S. General Accounting Office, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).