07.22.2019 0

Government Debt, Deficits, Bonds, Budgets: What does all this mean to the average citizen?

By Evan Slaughenhoupt

The U.S. Government debt, over $22 Trillion is a sum most cannot grasp. News coverage about deficits while still borrowing money is difficult for most to understand. The average citizen could be excused from comprehending any personal impact.

Simply put, debt is what’s owed to another whether it’s governments, businesses or individuals. Reducing debt requires income. When payment exceeds income, it creates a deficit; which can lead to more borrowing to make minimum payments – not wise.

Government issuing bonds simply means taking out a loan. Bond ratings are credit scores determined by bond rating agencies.

Part of the privilege I had being a County Commissioner, Calvert County, Maryland; was meeting with the bond rating agencies explaining the credit worthiness of the local government. Once the bond rating (credit score) is provided, the government can then issue bonds (take out loans). The higher the rating, the lower the interest rate applied to the loan.

The indebtedness of that county is currently $140 million. There are over 3140 counties, or their equivalent throughout America. If that county were average, a simple multiplication indicates a local debt burden nationwide estimated over $440 Billion.

Typically, such money is spent upon large capital projects such as buildings for Fire and Rescue, Schools, Government administrative offices, Parks and Recreations, and Public Works; things that generally are likely to have a life span longer than the length of repayment of the bond.

Issuing these bonds varies with jurisdictions. They range from a simple vote of elected officials, gaining approval from the state (such as Calvert County), to proposals voted upon during an election.

State bonding adds to this indebtedness. State bonded obligations in 2018, according to the American Legislative Exchange Council comprised a total indebtedness over $3.5 Trillion with the largest ($209 Billion California) and the lowest ($65 Million Wyoming).

Having debt is not bad. What is unacceptable is having insufficient or wrong management tools to control the spending. Fortunately, my own experience led an organization which had superior tools and management practices that in part allowed for the highest bond rating – AAA.

One such tool is the Debt Affordability Model. Simply used, the yearly payment of the debt could not exceed a preset percentage of the income. The self-imposed ceiling was 9.5% although the actual amount was typically 6 – 7%.

Numbers can lose the attention of many, but it’s simple to gauge debt affordability. Calculate the yearly payment on the total debt and determine the percentage. Households have those figures readily available from their own financial papers. Businesses and governments have such publicly available.

Individuals ought to look at their own debt affordability and see what their percentage is towards their own personal debt.

Besides the estimated local debt of $440 Billion added to the state debt of $3.5 Trillion, the very same taxpayers are also obligated to fund the U.S. Government debt. As of this writing, the current U.S. Government Debt is over $22 Trillion. The U.S. Government is making interest only payments while still accumulating debt; and is talking about raising the debt limit further (to spend even more money it has not collected). How can any of this be affordable over the long term?

Because the U.S. Government can print its own money, comparing their debt affordability using our local model is more challenging because the gross interest payments are what is relevant (14.3%) rather than the net (8.9% of revenue). It is unlikely the U.S. Government will default on Social Security or Medicare. They will unlikely default to those private and sovereign interests which own the public debt.

Adding the total U.S. Government, States, and Local debts (nearly $26 Trillion) divided by the current population of about 330 Million gives each of us a bill of nearly $79,000 plus our own personal debt.

Citizens should insist their elected officials view their obligations using the debt affordability model. Some jurisdictions may be at a reasonable level; but many, especially the U.S. Government need serious efforts to reduce debt and cut spending to slow down the growth of the debt.

Evan Slaughenhoupt is a former Calvert County, Md. commissioner.

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