Friday, June 24, 2005

The debt position and credit rating of the United States, now and into the future.

Over at Tax Analysts (in the pay section, so not generally available) economics correspondent Martin Sullivan gives an enlightening description of the current and projected debt and credit positions of the U.S. government.

Rather than commit major copyright violation, here are a few highlights:

National debt as % of GDP, currently:

Japan, 164%
Italy, 120%
France, 74%
Canada, 71%
Germany, 67%
United States, 64%
United Kingdom, 43%

The U.S. debt position is actually rather smaller than the average for the major developed economies.

The U.S. annual deficit, 3.5% of GDP in 2004, is somewhat larger than the average, but well within the normal range and the range of past U.S. experience. During the 12 years from 1982 (Reagan I) through 1993 (Clinton I) the US budget deficit exceeded 3.5% of GDP nine times and averaged 4.2% of GDP.

So much for claims that the current debt-and-deficit situation creates any sort of "crisis" or is unsustainable into the future. I'm certainly no fan of the Bush II administration's big-government spending tendencies -- but the reality is that today's fiscal position could be sustained indefinitely with no major inconvenience to anyone.

The problem the government faces is the change in its fiscal position that will arrive when the big entitlement bills start landing on its doorstep about a decade from now.

Hey, anybody who's really concerned about debt sinking an economy should be sounding the claxons about Japan. Its national debt is 2.5 times as large as that of the U.S., is being blown ever larger by an annual budget deficit 85% larger than the U.S.'s (6.5% of GDP in 2004) and its future fiscal exposure to the cost of entitlements and the effects of aging demographics is much worse.

What's going to happen to the world economy when the country with the second-largest economy among developed nations sinks beneath the waves?

I don't know -- but the U.S. will have plenty of warning about whatever bad effect excess debt may have on an economy just from watching the example of Japan, as it goes first.

But I digress ... back to the effect of entitlements.

Standard and Poor's has projected the future credit rating of the U.S. government -- specifically, of U.S. government bonds, currently considered the "risk free" investment -- on the basis of current law and standard economic projections:

Year -- rating
Until 2016: AAA
2017: AA+
2019: AA
2020: AA-
2022: A+
2023: A
2025: BBB+
2026 and later: Speculative (i.e. "junk")

Note well: that decline from AAA to junk takes just ten years from 2016, the year in which payments on the Social Security trust fund are projected to start coming due (not some 75-year span or the like, as defenders of entitlements so prefer to talk about).

So ... how old will you be in 2026?