This article is excerpted from the book Outline of the U.S. Economy, published by the Bureau of International Information Programs.
The emergency measures taken to stimulate the economy and shore up threatened financial institutions drastically increased the federal budget deficit, which represents the difference between federal spending and revenue. The federal budget had already gone into deficit during the George W. Bush administration, starting in the 2002 fiscal year. President Obama's 2009 stimulus package of new government spending and tax cuts brought the deficit, as measured in proportion to the entire economy, to a level not seen since the end of World War II. The Congressional Budget Office forecast the deficit for fiscal year 2011 at $1.5 trillion.
A bipartisan National Commission on Fiscal Responsibility and Reform appointed by Obama concluded in 2010 that the nation was on "an unsustainable fiscal path."
The commission noted that in 2011, the first of the Baby Boom generation of 78 million citizens would become eligible for Social Security and Medicare (the health program for the elderly), increasing the cost of these programs. If U.S. deficits continue to grow at the current pace, by 2025 federal tax collections and other revenue would cover only interest payments on the federal debt and "entitlement" programs (Social Security; Medicare; Medicaid, the health program for the poor; veterans' pensions and benefits). Nothing would be left for defense programs or federal support for education, transportation, housing, research and all the rest of government services.
As the 2000s decade proceeded, foreign investors financed an increasing share of U.S. government debt. In mid-2000, this debt totaled $1 trillion. Eight years later, the total was $2.7 trillion, with foreign government-owned banks or "sovereign" investment funds holding the fastest-growing share. Foreign entities used the U.S. dollars flowing overseas for manufactured goods and oil to purchase U.S. Treasury securities and other U.S. government debt. The United States, in essence, was borrowing from the future to finance current consumption.
U.S. government officials across the political spectrum agreed on the need to realign spending with revenues although they disagreed over the best strategy for doing so. After Republican Party gains in the November 2010 elections, passing legislation on spending and taxes became more protracted and difficult. "The hard truth is that getting this deficit under control is going to require broad sacrifice," President Obama said. He proposed a policy of combining spending cuts with a tax increase for a relatively small number of families with the highest incomes, but Republicans in Congress blocked any tax rise.
(This is a product of the Bureau of International Information Programs, U.S. Department of State. )