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Tuesday, Oct 23, 2012 6:47 PM UTC

WHY IT MATTERS: Debt

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Topics: From the Wires,

WHY IT MATTERS: DebtFILE - This Aug. 8, 2011 file photo shows a statue of former Treasury Secretary Albert Gallatin outside the Treasury Building in Washington. A sea of red ink is confronting the nation and presidents to come. The budget deficit _ the shortfall created when the government spends more in a given year than it collects in taxes and fees_ is on track to top $1 trillion for the fourth straight year. When there's not enough to pay current bills, the government borrows, mostly by selling interest-bearing Treasury bonds, bills and notes to investors and governments worldwide. It now borrows about 40 cents for every dollar it spends. The national debt refers to the total amount the federal government owes; the deficit is just a one-year slice. (AP Photo/Jacquelyn Martin, File)(Credit: AP)

The issue:

A sea of red ink is confronting the nation and presidents to come.

The budget deficit — the shortfall created when the government spends more in a given year than it collects in taxes and fees— topped $1 trillion for the fourth straight time in the budget year that just ended Sept. 30. When there’s not enough to pay current bills, the government borrows, mostly by selling interest-bearing Treasury bonds, bills and notes to investors and governments worldwide. It now borrows roughly 31 cents for every dollar it spends.

The national debt refers to the total amount the federal government owes; the deficit is just a one-year slice.

The U.S. has been borrowing since the 1700s, when it needed money to finance the American Revolution. The outstanding debt has since risen to a shade over $16 trillion. While there’s plenty of finger-pointing by politicians over who’s to blame, deficits historically surge during wars and deep recessions, and the U.S. has had both in the past decade.

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Where they stand:

President Barack Obama has proposed bringing deficits down by slowing spending gradually, to avoid suddenly tipping the economy back into recession. To help, he would raise taxes on households earning more than $250,000 annually and impose a surcharge of 30 percent on those making more than $1 million.

He acknowledges that his spending on recession-fighting stimulus, tax relief and bailout programs — much of it started under President George W. Bush — has contributed to the deficit. But so have bipartisan agreements to extend Bush-era tax cuts, and paying for the wars in Iraq and Afghanistan.

Also raising deficits: a drop in tax revenues as more people found themselves out of work and personal and corporate incomes that sagged in the deepest downturn since the Great Depression.

Republican candidate Mitt Romney would lower deficits mostly through deep spending cuts, including some of the reductions proposed by his conservative running mate Rep. Paul Ryan of Wisconsin, chairman of the House Budget Committee. But many of the cuts they’re pushing would be partially negated by their proposals to lower top tax rates on both corporations and individuals.

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Why it matters:

Deficits and debt are important because it’s never good to spend more than you make for too long. The party out of power always makes deficits a big issue against the one holding the White House — as Democrats did in 2008 and Republicans are doing now.

Leaders of both parties agree the burden will become unsustainable if borrowing is not reined in while interest obligations keep rising. But huge policy differences exist over how to balance the budget or at least trim deficits to manageable levels — whether through spending cuts, tax increases or a mix.

Obama and Democrats tend to favor a combination, while Republicans mostly want just spending cuts, although Romney and Ryan say they’d also end some tax deductions and close loopholes — without specifying which ones.

Congress sets a ceiling on how much the government can borrow. If this debt limit is breached, the government will default on its obligations. This has never happened, but it almost did last summer in a Capitol Hill standoff. As a consequence, the nation’s credit rating was downgraded for the first time ever.

The current $16.4 trillion debt limit will be reached late this year or early next. A slew of tax breaks will expire at the same time.

No matter who wins, he’ll immediately have his hands full.

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Follow Tom Raum on Twitter: http://www.twitter.com/tomraum.

More Tom Raum.

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