Politicians have a habit of trying to obfuscate facts that don’t paint a positive picture. Thus when uncomfortable discussions on the federal deficit cannot be avoided, attempts are made to conceal its true size. For instance, the Iraq war has been funded through emergency supplemental spending, leaving it outside the official federal budget and deficit numbers, though the spending is quite real.
A simple technique can be used to reveal the true* size of the annual Federal deficit. Since all federal revenue shortfalls (deficits) are paid for through increases in the total US debt, the increase in debt each year exactly equals that year’s real federal deficit.
Here is the amount of US Federal debt outstanding from 1997-2008, for Sept. 30th of each year:
|Year||US Debt ($ Billions)|
Using this data, we can calculate the true Federal deficit for each year, and compare it to the publicly announced deficit for that year:
|Year||Official US Surplus / Deficit ($Billions)||Actual US Deficit
($Billions, based on actual borrowing)
|% Larger than Official|
The Federal government’s need to borrow has been consistently understated in official deficits for the past decade, and has been as large as triple the official number! These numbers also show that the US government never actually ran a surplus at any time in the last decade. It appears that the first step to dealing with our government’s revenue shortfalls is to get our government to admit how large they are!
* Under US GAAP, federal deficits would be even larger, because they would take into account future Social Security and Medicare shortfalls. These programs are likely to be modified in the future, however, and so I believe that the method used above provides an accurate measure of the government’s cash deficit each year. This is a number most Americans would recognize – how much do you have to borrow to pay the bills each year?
** The argument might be made that during the “surplus” years of the late 90s, debt was increased simply to provide liquidity in treasury bond markets. This doesn’t make sense, however – if it had a cash surplus, the Treasury could easily have issued new debt while retiring old debt, leaving net debt unchanged. Economists generally take the view that government debt crowds out private sector borrowing, so why would the Treasury borrow if it didn’t need the funds?