RSS Facebook Twitter LinkedIn

Featured Advisor

Ed Meek
CEO/Investment Advisor

Edge Portfolio Management


State: IL

At Edge, a low client to advisor ratio allows for personal and customized service for each individual.  Our goal is to work as a team for each client to provide not only portfolio management but wealth coordination and financial planning.  We make every effort to have frequent communication with our clients and to provide timely response to calls and emails.  I also enjoy spending time with my wife and three kids, playing and following basketball, playing golf, and participating as an advisory board member for Breakthrough Urban Ministries.

Click to see the full profile

Share |

Part 2 – The Deficit and GDP

How the deficit is hurting GDP growth

When talking about the U.S. deficit and the national debt, it is easy to confuse the two or use the terms interchangeably.  They are not the same thing, but one definitely leads to the other. 

With all the talk of raging deficits, the debt ceiling and the economy, it is probably a good point in time to take a step back and see how this precarious situation began in the first place. 

The deficit refers to the amount of money that the government spends in a budget year in excess of what it collects.  For 2011, the budget deficit is projected to be in the neighborhood of $1.5 trillion dollars.  As we reported in Part 1 of this series, the GDP for 2010 was $14.6 trillion dollars.  With a modest 3% growth expected in the GDP for 2011, it is estimated that the U.S. budget deficit for 2011 will be about 10% of the entire GDP for the country, according to the Congressional Budget office.

Deficits in the U.S. have been the norm in this country for most of the past 50 years.  Since 1970, there have only been four years with budget surpluses.  Indeed, there have only been surplus years 8 times since 1950.  A surplus year is when the U.S. government actually spends less than it brings in.  In every other year during that time period, the government has spent more than it earned.

So where does that leave the U.S.?  Year after year of budget deficits (for 53 of the last 61 years, to be exact) accumulate, adding to the federal debt total.  Add to that debt (the principal) the interest on that debt and you can see the cash flow drain on the federal budget.  With the conflict in the Middle East requiring more funding for the Department of Defense, you have one escalating budget expense item.  Add to that total the growing expenses for entitlement programs such as Medicare and Medicaid (which are growing even faster than defense spending) and you now get a picture of how difficult it has been to cut the federal budget without impacting the quality of life for a great many of our citizens or our national security.

Which brings us back to our premise for Part 2, how does GDP affect the budget deficit, or is it the other way around?

Remembering that GDP is the total value of what the entire country produces, growing GDP is a good thing for an economy and it is largely determined by growth in the labor force, the amount of capital available and to some degree, the rate of technological advance.

The labor force is currently characterized by high unemployment, currently at 9.1%.  Those unemployed workers are not contributing to the output of the country (reducing GDP). Furthermore, they are not paying taxes (lowering government receipts) which also contributes to increasing the federal deficit.  Therefore, economic contractions and the resulting job losses contribute to higher deficits and lower GDP.

The availability of capital is crucial to a growing economy.  Right now, interest rates are at historical lows, in part because the U.S. government is “keeping” them at low levels in order to hold down the cost of servicing all the debt it has accumulated (more on this subject in Part 3).  So while the government is operating at a deficit, and paying interest on debt, they are making it difficult for the capital markets to operate freely and attract the capital necessary to help the recovery, create jobs and grow the GDP.  One way to look at why it is taking so long for the economy to recover and the GDP to rebound robustly, you might just want to look at who (or what) is consuming all the capital resources of the country.  You might just find that it is the federal government, covering its loan interest on its yearly deficits.

Here are some interesting facts pulled together by the Congressional Budget Office to ponder:

·         The 2009 deficit to GDP ratio was the highest in 65 years – before the end of World War II.

·         U.S. government debt held by the public will more than double by 2020.

·         The U.S. will spend $846 billion on Medicare and Medicaid in 2011…more than the entire GDP of Turkey.

·         The U.S.’s interest payment on its debt is $225 billion this year.

·         $4808 – that’s the share of this year’s deficit for each person in the U.S.

·         The U.S. issued as much debt in 2010 as the rest of the world combined.

·         In 2011, the U.S. government will spend $3.7 trillion. That’s $500 billion more than China, Canada, Australia and the UK spent together in 2009.

·         Government revenue will only be 15% of GDP in 2011.  That’s the lowest since 1950.

·         The debt ceiling in the U.S. has been raised 6 times since 2006.

·         Every single person in the U.S. would have to contribute over $40,000 each to pay off the national debt.

Next:  Part 3 – The National Debt