Deficits and Debt

Sep 2017
5,469
6,530
Massachusetts
#1
This is based on something I posted earlier as a response in a thread, but I thought it might be interesting for general consumption, since it's not widely understood.

Why do deficits not equal the change in the debt? For example, how is it possible that we can run a $600 billion deficit in a year, and yet the debt can rise over $1 trillion in that same year. Shouldn't the two be the same? Your first thought might be that it's because of the interest, but that's not right. First, obviously, interest isn't anywhere near enough to account for that difference. Second, interest on the debt is actually an item in the budget, so it already counts in the deficit.

There are two things going on. First, government accounting is done such that all outstanding treasuries count as debt, regardless of who holds them. So, for example, if government buys back $10 billion of its own Treasury bills, then even though those instruments are sitting in a federal government account, they still count as debt -- basically, money the government now owes itself. So, to get a handle on what the debt really is, you want to look at the amount owed to the public, not the full amount. The government breaks that down in its reports.

However, even if you just look at the debt owed to the public, it can rise a lot more in a year than the deficit. The reason is that debt used to purchase financial assets counts as debt, even though the assets and debt offset each other. So, for example, if the government issues $10 billion in new Treasury bills, and holds the cash in an account, that counts as an increase in the debt, even though it doesn't show up in the deficit, and even though it could pay the same debt off tomorrow with the cash. Similarly, if it used that debt to buy up gold, or stock, or any other negotiable financial value, it shows up as debt but not in the deficit.

Government loans work the same basic way. If the government makes a direct loan, or a loan guarantee, then for deficit purposes, all that gets counted is the expected loss on the loan. For example, if on average 5% of the value of government student loans is lost through default, then when the government loans out $10 billion in student loans, it counts $500 million in expected loss in the deficit, but it counts the full $10 billion in new debt it took on to raise the cash for those loans. Long-term 95% of that debt would be paid back with no need for any taxpayer funds, but until that happens, it still counts as federal debt.

You can see how this works in the FY 2017 budget:

https://www.govinfo.gov/content/pkg/...T-2017-BUD.pdf

If you go to S-13, you'll see that it says that for 2016 the unified budget deficit was $616 billion. However, there were other transactions affecting the borrowing from the public, other than the budget deficit. The treasury added $76 billion to its cash balance. You'll also see $104 billion was for direct loans, and $13 billion was for loan guarantees -- only the expected default under each of which showed up in the deficit. There was also an additional $203 billion in change for other financial assets and liabilities (things like issuing debt to finance the bulking up of gold for reserves). In each case, these are things that represent no net change in the value the government is holding (other than the expected defaults discussed earlier, which are counted in the deficit), but it all still gets calculated as debt.

All told, in FY 2016 that worked out to $396 billion of "other borrowing required" (i.e., other than the borrowing needed to cover the budget deficit) . So, the total increase in debt, once you count all that plus the deficit is $1.012 billion. That's how much the debt owed to the public rose, and obviously it's much greater than the budget deficit. But, the difference between the two could be paid off by way of the increased financial assets added in the year (the extra cash and gold, the amount we'll get from those IOUs others owe to the government, etc.)

Or, to come at that the other direction, just look down farther on Table S-13 and you can see how the "debt held by the public net of financial assets" between FY 2015 and FY 2016 went from $11,882 billion to $12,498 billion, which is $616 billion, which is the deficit that year.

For these reasons, although it's important to understand both the debt and the deficit, ultimately the deficit is the much more telling number. That tells you how far we're living beyond our means, rather than just recording the total value of treasuries outstanding.
 
Sep 2017
5,469
6,530
Massachusetts
#3
Deficits, Debt and Surplus and the paying of Debt are results of acts of congress
Ummm.... OK. My point here is merely to explain what the debt figure actually signifies (total outstanding value in treasury debt, regardless of who holds it), versus what the deficit signifies (basically, how far beyond our means we're living in a given year). Debt can rise more than the deficit when that debt is used to accumulate financial assets (accumulating cash, gold, the government's own debt, or debt from others).
 

TNVolunteer73

Former Staff
Nov 2014
32,807
8,466
TN
#4
The debt above the board are when the Nation borrows from SS and Medicare and DOT funds

you see the Government collected the Revenue but the revenue was targeted, and it was spent for projects outside the target.

They still owe the money back to SS, Medicare and DOT.

Since the revenue was collected and the money was in hand it was not included in the deficit
 
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Sep 2017
5,469
6,530
Massachusetts
#5
The debt above the board are when the Nation borrows from SS and Medicare and DOT funds

you see the Government collected the Revenue but the revenue was targeted, and it was spent for projects outside the target.

They still owe the money back to SS, Medicare and DOT.

Since the revenue was collected and the money was in hand it was not included in the deficit
The debt you're talking about is the debt held in government accounts -- the first part of what I discussed in the top post. But, even there, the accounting quirk I'm talking about matters. For example, say Social Security needs to invest $50 billion to cover retirements. By law, stupidly, it's required to invest all of that in federal treasuries. So, the Treasury has to create that much debt for it to buy. Even if the government then just holds the $50 billion in taxes that were used to buy that $50 billion in Treasuries, it still shows up as another $50 billion in debt. That's where it's important to understand how the financing works. It shows you the difference between if we spend that cash or if we hold it. If we spend it, it shows up as deficit. If we hold it, it shows up as debt but not deficit.
 

TNVolunteer73

Former Staff
Nov 2014
32,807
8,466
TN
#6
What I am saying those "Special Issue Government Bonds" you are addressing is when the SS Medicare or DOT funds are spent in the General Operational budgets instead of funding benefits for which the Trust was intended.

Example 10 billion of monies taxed for SS was spent Building a greenway in DC. The government will create 10 billion in Special issue bonds and the holder of the Bond is the SS Trust.

of course this money is never intended to be repaid. (Just as FDR stated would happen in his address to congress January 17, 1935) this is why FDR said that eventually SS should be partially privatized, or congress would find a mother load of monies of which it can spend and never have to repay.
 
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Sep 2017
5,469
6,530
Massachusetts
#7
What I am saying those "Special Issue Government Bonds" you are addressing is when the SS Medicare or DOT funds are spent in the General Operational budgets instead of funding benefits for which the Trust was intended.

Example 10 billion of monies taxed for SS was spent Building a greenway in DC. The government will create 10 billion in Special issue bonds and the holder of the Bond is the SS Trust.

of course this money is never intended to be repaid. (Just as FDR stated would happen in his address to congress January 17, 1935) this is why FDR said that eventually SS should be partially privatized, or congress would find a mother load of monies of which it can spend and never have to repay.
I understand that. I’m pointing out why that makes paying attention to the deficit, rather than the rise in debt, the more useful way of tracking our financial status. Whether we spend those funds or accumulate assets shows up differently in the deficit calculation, but not in the debt calculation.

As for SS, it’s been going strong for over 80 years, and can continue to do so with some small tweaks ( the most important being lifting the annual cap, the same way we did for Medicare). There’s no need to privatize it. There are all sorts of strategies that can prevent SS funds from being misappropriated, but generally conservatives aren’t interested in those, because their stated concern is just a disingenuous argument designed to get them to their real goal of privatization, as a way of enriching Wall Street and destroying the redistributionist aspect of the program.
 
Likes: 1 person
Jul 2014
38,922
33,906
Border Fence
#8
here is the bottom line

You can see where Democrats were in office




You can see the difference in tax and spend.....and cut and spend.
 

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