Most Americans already know that the federal government has significant debt problems that grow worse every day. But the many citizens also believe that public officials act responsibly and would only allow us to have a reasonable amount of debt. Unfortunately, very few voters truly comprehend the position that the country is in when it comes to the national debt and how it will impact them in the future.
That national debt denotes U.S. government debts by gross volume at a specific point in time and it includes the combined value of all Treasury notes owed by all federal agencies. Gross national debt falls into two subcategories of agency debt like Social Security Trust Fund deficits and the total value of privately-held bonds payable by federal entities. Thus, the national debt is viewed as a snapshot of the entire amounts owed by the federal government at a given time.
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This is much like consumers who finance new vehicles or homes that seemingly reflect grossly skewed personal gross debt for a relatively short period of time. Once enough time passes to demonstrate consistent repayment, a more complete picture develops that reflects the true financial stability or instability of the borrower. A good example of gross national agency debts in personal finance contexts are retirement accounts. Suppose the proud owner of that new home or shiny car must dip into a 401k plan to cover their monthly payments? They’re essentially becoming indebted to themselves and reducing the funds that will be available when they retire or pass away.
The loan from their own 401k allows the consumer to indulge and spend beyond their income today but will cost them in the future when they have to pay back the loan. This is the same as what Uncle Sam is doing today by borrowing more money every year. The government is essentially taking income from future citizens and using it to pay for expenses that benefit people today.
A deficit refers to the difference between how much the government spends above and beyond how much the government collects from taxes over a specified amount of time (usually a year). By contrast, a surplus occurs when the government collects more revenue from taxes that it spends in a given timeframe. Deficits and surpluses are subject to change based almost solely on gross revenue and total expenditures during a relevant periodic budgetary cycle. If the government runs a deficit it will need to borrow money to pay for the excess spending. If it has a surplus, it can use the money for additional spending or to pay down debt.
Unfortunately, the national debt doesn’t just take money from future citizens and spend it today. It also costs money in the form of interest payments. When the government has a national debt, it has to pay interest on the loan. The amount of the interest that needs to be paid goes up as the amount of the national debt increases.
In 2016, the United States national debt was approximately $19 trillion. That equates to roughly $60,000 per person in the country. In 2015, the interest payments on the national debt were approximately $400 billion. The total amount the government collected in taxes in 2015 was approximately $3.2 trillion. So it cost the federal government roughly 12.5% of all of its income in 2015 just to pay the interest on the national debt. That means if we had no national debt, we could have spent an additional $400 billion on government services or we could have lowered taxes by $400 billion or 12.5%.
One can quickly see how destructive debt can be when it comes to the ability to provide government services or lower tax rates. The government has to spend a big chunk of its income just to pay for the interest on the borrowing of previous generations. And that doesn’t even begin to mention the impact of actually paying back the loans. If the government started in 2016 to provide no services at all it would take roughly 6 years to pay off the national debt.
Is there any way out?
There just might be a way to tackle the debt problem with the “one-cent solution”. It is perhaps the most beautifully simple resolution proposed yet for addressing the national debt. The plan contemplates three strategies that propose a 1% reduction in annual government spending (except debt service) for 5 years; annual spending limited to 18% of gross income generated in the nation during the initial 5-year implementation period; after which time both conditions would continue indefinitely.
Best known as the “Penny Plan”, it began when GOP colleagues Rep. Connie Mack (FL) and Sen. Mike Enzi (WY) sponsored the legislation formally titled the “One Percent Spending Reduction Act of 2011”. Since then, their jointly conceived plan has received fanfare as a bold solution that holds great promise.
Besides an 18% annualized federal spending cap, the Penny Plan is designed to require Congressional evaluation of every government operation before final approval is granted for any budgetary allocation. That stipulation contends to ensure that all proposed spending will fit within statutory guidelines. Sole exceptions permitted are “critical” functions that would trigger additional funding cuts by at least 1% in other areas for each of the next 6 consecutive years.
Proponents say the plan will slash total spending by $7.5 trillion within 10 years after implementation. It accomplishes this goal by demanding factual cuts in each discretionary or entitlement-based program of at least 1% per annum. The key is that not only does it cut spending across the board, but it also keeps the government from growing expenses every year. If implemented, the Penny Plan would balance the federal budget in 6 years.
America’s federal budget deficit has grown steadily in recent decades mainly due to excess spending by both Republicans and Democrats. The fact is that politicians want to increase spending or lower taxes to make themselves look good while they are in office. The problem is that that means future generations will suffer and that there is no motivation for them to balance the budget or pay off the national debt. Absent public vigilance there is simply no way that politicians from either party will take the national debt seriously. It’s time to stand up and let our politicians know that they need to address the national debt.