Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, February 17, 1993 TAG: 9302170126
SECTION: NATIONAL/INTERNATIONAL PAGE: A1 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
QUESTIONS ABOUT U.S. DEBT, DEFICIT
Presidents Reagan and Bush promised to balance the federal budget and never got close.Though President Clinton never promised to end red-ink spending - only to cut it roughly in half - the plan he will unveil today is widely anticipated as a serious effort to reverse a decades-long trend of increasing deficits.
Can he do it? And what if he doesn't?
Here are some basic questions and answers.
Q: What exactly is the budget deficit?
A: It's the amount by which the government annually spends more than it takes in. Last year, the deficit was a record $290 billion. This year it is expected to reach $327 billion. Deficits usually are talked about in annual terms, as if the books were wiped clean each year. They aren't. The deficit keeps accumulating. The total deficit - also known as the national debt - stands at $4.1 trillion.
Q: How is government able to spend more than it takes in?
A: The same way people do so - by borrowing. In the government's case, it borrows money by selling bonds and Treasury bills. Sometimes it also borrows from itself - advancing money, for instance, from the Social Security trust fund to pay for other items.
Q: How important is it to cut the deficit? After all, the government has been spending more than it takes in for quite some time.
A: The bad effects are not always immediately apparent - just as a family can maintain a certain standard of living for a while by running up credit card bills. But it's a false standard of living, because at some time the bills must be paid. It has been said that maintaining high deficits assures our children and grandchildren will end up paying the debts we run up.
Q: So what's so bad about that?
A: It isn't just a matter of postponing bills. The national debt has quadrupled since 1980. It threatens to strangle the U.S. economy if not checked. The high deficit ties up resources and keeps long-term borrowing rates high. Because of high interest costs, the national debt is now growing at a faster pace than the economy itself.
Q: How much interest is being paid on the national debt?
A: This year, $210 billion. The Congressional Budget Office estimates it will increase to $350 billion annually by the end of the decade. Nearly all economists agree this is unsustainable.
Q: What happens if the government can't meet all its interest payments?
A: The government could default - something it has never done. The United States is the world's largest economy, accounting for one-quarter of gross world product. A default by the U.S. government could trigger a worldwide recession.
Q: Can't the government simply print more money?
A: Sure. That would be the worst possible way out of the deficit dilemma, devaluating the dollar and creating instant inflation. Such a move would make every American's dollars worth less, eroding savings accounts and salaries alike.
Q: Why does the deficit tie up resources?
A: Paying interest on the national debt represents money that can't be spent on other programs, such as health, education or road and highway repair. The Congressional Budget Office estimates that, if unchecked, the deficit will grow to $500 billion by the end of the decade - including $350 billion in those interest payments.
Furthermore, with the government borrowing so much money, private funds that might otherwise be used to loan money to businesses or individuals are tied up. That means less money - and higher rates - for home mortgages, starting up new businesses or expanding old ones.
And the large requirement for borrowing goes beyond domestic sources of money, forcing the government to borrow heavily from Japanese and other foreign investors.
Q: How does the deficit affect interest rates?
A: Although U.S. rates have come down substantially, it's all relative. The high deficit requires the government to sell bonds and Treasury bills at interest rates high enough to draw the requisite number of buyers - and that applies long-term heavy pressure to keep U.S. interest rates higher than rates in other industrialized nations.
Q: What is Clinton trying to do?
A: His most recent pledge is to try to cut $145 billion from the annual deficit in his fourth year, about a 38 percent reduction. During his campaign, he vowed to halve the deficit. But administration officials have said the deficit has grown so much over the past year that such a pledge cannot be met. Even so, it will take a huge package of tax increases and spending cuts totalling about $500 billion over the next four years to reach his goal.
The White House is now saying that will mean tax increases, in one way or another, for nearly everyone earning over $30,000.