US lives on money borrowed from other governments. America’s budget deficit is not a new problem but has rapidly evolved to crisis levels .Expenses exceeded revenue in all but 5 of last 47 years. This is a problem, and the problem – measured by rising losses and a rising debt load – is getting worse. So let us look at this problem in detail:
1. US Debt problem is larger than you think:
See the actual numbers below:
Break up of US Government Spending:
As seen from the figure; social security, medicare and medicaid are biggest entitlements; almost 75%.
2. The size of the debt is highly sensitive to economic fluctuations :A deviation of 1 percent of average GDP growth over the next decade increases or decreases the U.S. deficit by roughly $3 trillion on a cash basis over 10 years. America’s reliance on short-term debt exposes it to interest-rate volatility.
3. Higher debt could affect American competitiveness:Federal debt may raise the cost of borrowing for domestic-based American companies. When the government runs large deficits, it competes for funds that could be invested in the private sector. Higher costs for capital and limited access to investment will impact the borrowing costs of companies as well.
In the next article we will explore possible solutions to this problem. Stay tuned!