What Happens When the Debt is Greater Than the Economy? We're About to Find Out.

Posted by - Wednesday, June 8th, 2011

A U.S. Treasury report indicates that our country's debt will be greater than the size of our economy before the year's end. Last year, similar reports suggested that would not happen until 2014. But it is happening; three years earlier than anticipated.

national debt

Here's what's going on and what led us to this point (in a nut-shell):

The public debt to GDP ratio is projected to surpass 102 percent in 2011.  

Today, the White House's GDP estimate for 2011 is $219 billion less than it was one year ago.  If we view debt on that spectrum, as a percentage, it will always look higher because the numerical percentage is taken from a lower number.  

Regardless of any misleading views of the statistics, the debt did grow quite a bit.  And it did so for a few reasons.

First, the tax cut deal between the Republicans and President Obama last December greatly contributed to the debt crisis.  The Congressional Budget Office claims that approximately $858 billion is expected to be tagged onto the deficits over the next ten years, with $410 billion of it being added to the deficit in 2011.

According to the Chicago Tribune:

The tax cut package extended all the 2001 and 2003 tax cuts for another two years, enacted a one-year Social Security tax holiday and reduced the estate tax.

Democrats and Republicans disagree on a lot, but both sides have indicated a desire to make the 2001 and 2003 tax cuts permanent for at least the majority of Americans -- a costly proposition.

It's no secret, the GOP has made it perfectly clear that it will not use tax increases as a measure to raise the debt ceiling.  

Dave Camp, lead tax writer in the House, is adamant that even the slightest increase in debt limit must co-exist with serious spending reductions and "real entitlement reforms."

Maya MacGuineas, president of the Committee for a Responsible Federal Budget suggests reforming the tax code to bring down the debt.

U.S. National Debt Clock: Real Time


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