This week President Obama submitted to Congress his budget proposal for fiscal 2011 (ends September 30, 2011) through 2020. Deficits for the 10 years average $853 billion (4.5% when expressed as a percentage of Gross Domestic Product- GDP). U.S. national debt held by the public (meaning doesn't count debt held by other U.S. government agencies) as a percentage of GDP is projected to rise from 53% at the end of fiscal 2009 to 77% by 2020. A web site has been established with all budget related information at http://www.gpoaccess.gov/usbudget/.
The ratio of debt to GDP is a big deal because those who buy our debt use this as a measure of risk in setting interest rates for such debt. History is instructive here. In 1960 debt was 46% of GDP, after declining from a high of 109% in 1946 from costs of financing WWII. This decline continued to a low debt to GDP of 24% in 1974. As recently as 2001 debt to GDP was 33%. A rise to 77% in 2020 would make us a much bigger lending risk and would certainly drive interest rates higher.
The economic assumptions in the budget proposal reflect assumed 10-year Treasury interest rates (which are presently about 3.6%) averaging 4.5% in fiscal 2011 and then rising to a maximum of 5.3% over the balance of the time to 2020. Actual interest rates could be much higher than these projections in a world where large budget deficits continue. Higher interest rates would make reducing the budget deficit even more challenging.
No political leader of either party has put forth credible ideas of how to deal with this problem. It takes political courage and the ability to voice why shared sacrifice now will protect future generations. We can only hope some true leaders will step forward with some real solutions. The longer we wait the harder the ultimate fix will be on everybody.