Sometime on May 26th, the gross U.S. national debt clocked in at $13 trillion. But what does that mean? I've seen the debt statistic thrown around as a warrant for why we need to cut government expenditures. Though the conclusion is correct, the debt statistic doesn't tell the whole story. The $13 trillion statistic is the gross national debt, a somewhat misleading measure of debt because it includes money that the government owes itself (such as assets in the Social Security trust fund). Publicly held national debt, which is just under $8.5 trillion, is what we care about because it is a measure of how much the U.S. owes both Americans and the rest of the world. While that doesn’t include state and local government debt, as my colleague Zach Wilkes has pointed out, $8.5 trillion is the less sensational but more accurate measurement of national debt.
However, the debt statistic, in and of itself, means nothing. To make any policy conclusions, we need to be able to evaluate if our current debt accumulation rate is sustainable. We can do this, in part, by looking at our debt-to-GDP ratio, which gives us an idea of how capable we are of paying for debt.
The graph above shows both the historical publicly held debt-to-GDP ratio and the Congressional Budget Office's projections based on President Obama's FY2011 budget. It's painfully obvious that our current policies and proposed budget are not fiscally responsible--they will accumulate debt at a rate that diminishes our ability to pay for it.
The President's Fiscal Commission is largely tasked with ensuring that the above graph doesn't go from projection to reality. Its mission is to bring deficits (our yearly cost overruns, not to be confused with the accumulated $8.5 trillion national debt) down to about 3% of GDP by 2015, which corresponds to about a 75% debt-to-GDP ratio in 2015. The CBO projections show that unchanged, Obama's budget will miss the 2015 debt-to-GDP target by about 2%. What's more worrying, though, is what would happen in the next 5 years.
In the year 2020, the Fiscal Commission's target corresponds to about a 78% debt-to-GDP ratio. With no changes, our current policies would skyrocket debt to 90% of GDP, missing the target by 12%. If these numbers startle you, you're not alone. It just goes to show how unsustainable government expenditures and policies have been. Now, we are scrambling to prevent our 2020 debt-to-GDP ratio from climbing above 78%, which is more than double the 1970-2010 average!