Debt, Deficits, and GDP

It is often stated that the U.S. budget deficit as a share of GDP is smaller than it was during the 1980s, and therefore, current imbalances are neither unprecedented or cause for great alarm. Of course there are those who say these deficits don't matter at all, but that discussion is best left for another day.

The phrase, "The budget deficit is only three percent of GDP" is the somewhat reflexive response of many when defending the coexistence of a reportedly healthy economy alongside the growing list of current imbalances - budget deficit, trade deficit, savings rate, etc.

Over the last few years, this has been stated repeatedly, by many.

Looking at the federal debt which has been rising at the rate of over $500 billion a year for the last few years and hearing of budget deficits closer to $300 billion or $400 billion during the same period, a natural question to ask is, "How does total new federal debt, as a percent of GDP, compare with previous periods of high deficits?"

There are no bold conclusions today, not even a good question, really - just this chart.


Click to enlarge

This data was taken directly from the White House Office of Management and Budget historical tables and the first three bars shown for each year contain the on-budget, off-budget, and total surplus or deficit. The fourth bar is the difference between the current year outstanding federal debt and the previous year outstanding federal debt.

The chart was fairly easy to whip up, then it got hard.

After reading this, we don't feel so dumb anymore:

Everyone talks about the federal debt, but few, literally, know what they are talking about. That is all the more true for the federal deficit, which year after year adds to the total debt outstanding.

This was written back in 1993, but it makes the case fairly well that trying to make sense of the plethora of data and analysis regarding the federal budget deficit and rising federal debt is not for the faint of heart. Maybe that's by design.

Before the talking stops here, lest the above characterization inarguably apply, there are just a couple of notes and a feeble observation or two to offer.

First, the off-budget surplus/deficit is basically Social Security - there is a very small component that is not the Social Security surplus, but that amounts to a tiny fraction of the total. Also, to get the total budget surplus/deficit, just add the on-budget and off-budget amounts - this applies to both the absolute amounts as well as the percent of GDP shown in the chart.

In all cases, the total new debt exceeds any measure of the budget deficit. Not having had time to track this down, it can only be concluded that there are some "off-off-budget" items adding to the debt each year.

The "off-off-budget" amounts seem to be increasing.

The only on-budget surplus occurred in 2000, and at the time, this was projected out into the future and sometimes referred to as "the surplus problem". What was going to happen to the treasury market as the debts were not just serviced, but actually paid down?

Problem solved.

Finally, in an answer not nearly as satisfying as might have been hoped for at the outset of this quest, it does seem to be clear that when viewing new debt as a percent of GDP, the last few years look a lot more like the 1980s than many would prefer to believe.

Five percent sounds a lot worse than three percent.