On May 14, the Congressional Budget Office (CBO) released a report titled “Updated Budget Projections: Fiscal Years 2013 to 2023”. When the CBO produces these budget projection reports, they fall short of telling us exactly what we most want to know. We want to know what the complete U.S. debt is as a percentage of gross domestic product (GDP) and what it is projected to be in the future. Fortunately, the CBO budget projection reports provide us with enough data to piece this information together and more. Also, fortunately, the International Monetary Fund (IMF) produces debt-to-GDP projections for the U.S. and many other countries.
The problem is that the CBO focuses on “debt held by the public” (which includes foreign persons and entities) versus the complete U.S. debt in its budget reporting. The public debt excludes “Treasury securities held by federal trust funds and other government accounts”. About half of the non-public debt is held by the Social Security Trust Fund. The U.S. government needs to pay the owed interest and principal payments to the Social Security Trust Fund because, if they do not, the fund will be short of money to make Social Security payments to retirees and others. The other non-public debt is probably of similar importance. The public debt alone is far less than the U.S. government actually owes.
Measures of US Debt to GDP
Below is a chart I developed using May 2013 CBO and April 2013 IMF data. The chart enables us to readily compare different measures of U.S. debt-to-GDP. There are six different measures of U.S. debt-to-GDP on the chart.
CBO Public Gross: The public debt only. (The CBO provided this data.)
CBO Public Net: The public debt minus “the value of outstanding student loans and other credit transactions, financial assets (such as preferred stock) purchased from institutions participating in the Troubled Asset Relief Program, cash balances, and other financial instruments”. (The CBO provided this data.)
CBO Gross: The public and non-public debt. (I calculated this data based on data the CBO provided.)
CBO Implied Net: The public and non-public debt minus “the value of outstanding student loans and other credit transactions, financial assets (such as preferred stock) purchased from institutions participating in the Troubled Asset Relief Program, cash balances, and other financial instruments”.(I calculated this data based on data the CBO provided.)
IMF Gross: The public and non-public U.S. debt. (The IMF provided this data.)
IMF Net: The public and non-public U.S. debt minus “financial assets corresponding to debt instruments”. “These financial assets are monetary gold and SDRs (IMF Special Drawing Rights), currency and deposits, debt securities, loans, insurance, pension, and standardized guarantee schemes, and other accounts receivable.” (The IMF provided this data.)
All CBO projections assume then-current laws remain unchanged. The net debt measures are better than the gross debt measures because they give a more complete picture of the situation. In looking at the chart, please take special notice of four things.
(1) The IMF Gross is higher than the CBO Gross for fiscal year 2012, even though these are both actual, versus projected, figures. The IMF appears to count more things as debt than the CBO does.
(2) The IMF Net appears to be more comprehensive than any of the CBO or derivable-from-CBO-data debt-to-GDP figures.
(3) The IMF is not as optimistic as the CBO regarding U.S. debt-to-GDP reduction. Both entities see the U.S. debt falling beginning in fiscal year 2015, but the IMF sees the improvement being more muted.
(4) The CBO projects that debt-to-GDP will begin to grow again in the later years of the 10-plus-year (fiscal years 2013 thru 2023) period projected.
Note: The end-of-2023-fiscal-year projected debt situation is slightly worse (0.2) than pictured due to a “shift in the timing of certain payments”.
The following quote from the CBO explains why the debt is projected to begin growing again in the later years of the 10-plus-year period:
“Because revenues, under current law, are projected to rise more rapidly than spending in the next two years, (annual budget) deficits in CBO’s baseline projections continue to shrink, falling to 2.1 percent of GDP by 2015. However, budget shortfalls are projected to increase later in the coming decade, reaching 3.5 percent of GDP in 2023, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. By comparison, the deficit averaged 3.1 percent of GDP over the past 40 years and 2.4 percent in the 40 years before fiscal year 2008, when the most recent recession began.”
Part of the reason, at least, that the IMF is not as optimistic as the CBO regarding U.S. debt-to-GDP reduction is that the IMF sees U.S. GDP growth being 0.11% less, on average, from fiscal years 2013 thru 2018 than the CBO does. The IMF also sees U.S. GDP growth being shaped differently. Below is a chart that illustrates these points.
The CBO probably understands U.S. debt and GDP better than the IMF does, as they specialize in U.S. budget estimates. The IMF provides a more independent view of the U.S. debt and GDP situations though.
US Debt Comparisons with Like Countries
How does the U.S. debt situation stack up against the debt situations of like countries? To answer this question, we will use IMF Net figures for fiscal years 2012. Government fiscal years vary from country to country. Some countries use the calendar year and some use a different timeframe, so a comparison between the fiscal year debt-to-GDP ratios of numerous countries is never exact.
35 countries are labeled as having “advanced economies” by the IMF. 25 of these countries are listed in the chart below. Net debt-to-GDP data was unavailable for the other 10 countries. Using 2012 is good because the IMF has actual, versus estimated, data for 13 of the 25 countries listed below; and the 12 estimates should be relatively accurate since the data is as of April 2013.
The 10 non-listed countries are Cyprus, the Czech Republic, Hong Kong (which is, actually, not a country, but, instead, a Special Administrative Region of China), Luxembourg, Malta, San Marino, Singapore, the Slovak Republic, Slovenia, and Taiwan. Of these 10 countries, based on IMF Gross figures, only Singapore can possibly have a worse 2012-fiscal-year IMF Net than the U.S., with Malta being an unknown.
In looking at the chart, you can see that, by the IMF Net measure:
(1) The continental Nordic countries (i.e., Norway, Finland, Sweden, and Denmark) and nearby Estonia are financially strong.
(2) Australia and New Zealand are in relatively good financial condition.
(3) Only four of the five PIIGS countries (i.e., Portugal, Italy, Ireland, and Greece) and Japan are financially weaker than the U.S.
The U.S. dollar is the most important currency in the world. This being the case, the U.S. can have a higher debt level than other nations. The U.S. dollar is slowly losing its prominence though, and this decline in prominence is inevitable. Japan’s debt is over 90% domestically held, whereas about one-third of U.S. debt is foreign held.
You can see why the CBO projects Treasury interest rates to eventually be a little higher than they were before the U.S. recession and financial crisis. The net national debt is a lot more elevated than it was before these events, and it has reached a concerning level.
Quoting the public debt, versus the public and non-public debt, is, at least, a bad habit that people and entities should cease. It is the complete debt level that is important. The government needs to pay back the debt, whether it owes the debt to someone else or one of its own entities; or there will probably, if not definitely, be another price to pay (like curtailed Social Security benefits).
Net debt measures are better than gross debt measures, and they should be quoted much more often. Think of governments, somewhat, as if they were corporations. It is not just important how much they owe. It is also important how much they have in assets that can be liquidated, if necessary (to pay off debt or for other purposes).