National Debt and Deficit
Taxes
The US government raises money by taxing people and citizens. Americans generally oppose taxes, Republicans more than democrats. In general American's taxes are less than that of other western nations.
Medicare Tax
taken out of individual pay and goes to the Medicare fund so that when Americans reach 65, they get health care paid by the government. Health care for the elderly is many times more expensive than for younger people since elderly people have more medical issues than younger people.
Interest
the price paid for taking a loan. For example let's say Mr. R wants to take a $40,000 car loan from a bank. The bank will check his credit rating to see if he has a good history of paying his debts. If they give him the money, Mr. R will need to pay back the loan plus the interest. Loans are a way for banks to make money. It works the same way when people by US bonds.
Federal taxes
laws taking money from people and businesses to be used by the government
Ways to balance the federal budget and bring down the national debt
Raise taxes to bring in more revenue;Cut Government spending;Grow the economy
Reasons for current national debt levels:The US went to war in 2 countries and hugely increased defense spending.
Sept 11, 2001 changed everything. Under Pres. Bush the US government borrowed money (instead of raising taxes) to pay for these wars. The cost of the wars is expected be over 5 trillion dollars by the time they are over. Afghanistan is still going on today and only under President Obama were war costs actually included in the Federal Budget. (Pres. Bush used emergency spending bills to pay for the wars).
Social Security Tax
Taken out of individual pay and goes to the Social Security fund so that when Americans reach retirement age, they can get some of the money back from the government to live on. The amount they get depends on how much money they have and when they choose to start getting Social Security. A future problem with Social Security is that it is paying out more money than it is taking in! This is because people are living longer and there are more older people now than ever before.
How does the US Government borrow money?
The US government borrows money by selling US bonds to people and companies. Very much like War Bonds during WWII, people and businesses buy bonds as a way to make money (invest). They get their money back plus interest when the bonds come due-often many years after they are purchased. Because the world believes that the US will always pay its debts, US bonds are seen as a safe investment. If US defaults on its debts by not raising the debt ceiling, people may NOT want to by US bonds anymore.
How the US spent its money in 2011. US budget is $3.8 trillion. $1.3 trillion is deficit (borrowed) spending.
income security 17%;medicare 13%;other 1%;national defense 20%; social security 20%; interest 6%; health 10%; Education, training, employment and social services 3%
federal budget
is a law passed by congress and signed by the President every year that detail what the government will spend money on in the upcoming year.
GDP or Gross Domestic Product
is a measurement in dollars of all goods and services produced inside the borders of the U.S. in a year regardless of what country owns the business. If debt is more than 80% of the total GDP then it can hurt the economy. The US is currently at about 100% debt to GDP ratio
Fiscal Policy
is how the Government raises and spends money. This includes taxes and borrowing money.
The danger of a national debt that is too large
is that the US government will be unable to borrow money in the future or have to pay much more in interest for the money it is borrowing. This could slow the economy (recession) or bring it to a stop (depression). However, this would hugely impact the world economy because Americans are the biggest consumers of goods and services in the world. If Americans stop buying things the whole world economy would struggle.
federal budget deficit
is the amount of money our government needs to borrow in a year to meet expenses listed in the federal budget
Debt Ceiling
is the maximum amount of money the US can borrow by law
national debt
is the total amount of money our government has borrowed (through selling bonds) over time.
federal budget
is usually passed a year before it takes affect. That is the 2013 federal budget will be passed in 2012.
Default
is when the government (or anyone) can't make the payments on a loan
Ways to balance the federal budget and bring down the national debt
1. Raise taxes to bring in more revenue. Very unpopular with most politicians but especially Republicans who say it hurts the economy. Democrats say the rich should pay more in taxes. 2. Cut Government spending. The question though is, what gets cut? 3. Grow the economy. If the economy grows, more people have jobs and they make more money. This way the government gets more money without raising taxes. The problem is though, how do you grow a 16 trillion dollar economy?
Debt to GDP Ratio
A 30-50% debt to GDP ratio is considered "good" by most economists. However over 70% Debt to GDP ratio can cause problems for countries. The US is at or over 100% Debt to GDP ratio. This is considered bad for the economy. The US had over 200% during WWII but that was because it had to borrow lots of money to pay for the war (war bonds.) If a Debt to GDP ratio is too high, a country's credit rating could be reduced which could mean its bonds would not be worth as much. It could make it very hard for the country to borrow money and hurt the economy.
The world economy is based on borrowing!!
Almost all business must borrow to exist. Borrowing creates debt, so debt is necessary in the modern economy. If banks won't lend money or make it too expensive to borrow money (high interest rates) the economy could go into recession. During the "Great Recession" big banks began to fail because they had made so many bad loans. Banks didn't want to lend money so the US government had to step in, stop banks from failing and give banks loans so they could have money to loan to businesses and people.
How the US spent its money in 2011. US budget is $3.8 trillion. $1.3 trillion is deficit (borrowed) spending.
Note that Defense and social security are the same however, when combined with veterans benefits defense spending is the largest single expense. However, payments to people in the form of Social Security, income security (welfare), Medicare and Health care combined to be over 45% of all spending. Interest on the national debt accounts for 6%. "Other" is what the president can directly control; the rest is set by law and can only be changed by Congress passing a bill that the President then signs.
Income Tax
People and business pay income tax to the US government on the money they earn. This is allowed by the 16th Amendment to the Constitution.
Reasons for current national debt levels:
Pres Bush cut taxes in 2000;The US went to war in 2 countries and hugely increased defense spending;The size of the government also grew;When the recession hit, in 2007, the US had to borrow hundreds of billions more to pay for the economic stimulus and bailouts.
Reasons for current national debt levels:When the recession hit, in 2007, the US had to borrow hundreds of billions more to pay for the economic stimulus and bailouts.
These payments gave people income that they could spend and kept "too big to fail" companies from going bankrupt and putting thousands more Americans out of work. The government, already heavily in debt because of the war and the tax cuts felt it had to do this to avoid a depression instead of just a recession. Both Pres. Bush and Pres. Obama signed stimulus bills passed by congress. We are currently at about 100% debt to GDP ratio and are approaching the US Debt ceiling set my law.
Reasons for current national debt levels:Pres Bush cut taxes in 2000.
Under Pres. Clinton (1990's), the US had a budget surplus because he cut defense spending (the cold war was over) and the economy was growing at a fast rate (more tax dollars for the government). With the government still running a surplus, Pres. Bush cut taxes in 2000 (before Sept 11th) and gave Americans rebates (checks from the government) using surplus money. These tax cuts have stayed in place ever since.
Reasons for current national debt levels:The size of the government also grew
after the Sept 11 attacks with the addition of the Department of Homeland Security and the thousands of people hired to increase security in the US. This was approved by congress and cost billions of dollars. Again the money to pay for this came from increased borrowing not taxes or cuts in other areas.