U.S. Debt To Exceed Size Of Economy This Year

As it appears, debt problems of the U.S. are getting worse by the day. Reports from the U.S. Treasury say that the national debt is expected to outgrow the size of the economy this year. This is the first time U.S. will encounter this infamous distinction.

In the previous year, the treasury predicted that the national debt would not reach the record until 2014. But recent developments show otherwise. The expected total debt for this year is forecast to be 102% of the GDP, which is much higher than 96% as forecast earlier.

What are some of the reasons behind such an abrupt rise?

There are two main variables seen as the cause of this debt inflation.

First, Fed’s GDP estimate for this year was $219 billion lower than the previous year thus the debt percentage is higher than initially envisioned.

Second, the deal made between President Obama and the Republicans will result into significant deficits over the next decade. The Congressional Budget Office reported that $410 billion of this deficit will accrue in 2011 alone and a total of $858 billion deficit over the next ten years.

The administration’s economic policy extended the 2001 and 2003 tax cuts for additional two years, passed a one-year holiday on Social Security tax and lowered down the estate taxes.

Although the Republicans and Democrats have contrasting views on a lot of issues, both sides agree that the 2001 and 2003 tax cuts be made permanent for majority of the American population -- an expensive proposition.

Republican leaders believe that increasing taxes is not an option during a sluggish economy while tackling the debt problem. House’s lead tax writer, Dave Camp, says that the numbers presented by the Treasury are enough for the government to consider reduced expenditure and real entitlement reforms. The Republicans have staunchly criticized the Obama government for excessive spending.

The majority of economic observers suggest a credible revamp of the complex tax code by making it simpler and easier to implement. Many experts agree that tax reform is said to be the best way of cutting down the national debt.

Economist Ken Rogoff and Carmen Reinhart found out during their research that when the national debt increases above 90% of the size of its economy then it loses one percentage point growth every year. The upcoming 2012 elections and stalled negotiations over raising the debt limit make any solution of this critical problem even more difficult. Treasury chief Timothy Geithner has warned that the current debt limit of $14.3 trillion will be hit on August 2, 2011 after which these is a risk of U.S. defaulting on its existing financial obligations. S&P has already lowered the outlook on U.S. debt and Moody’s, another ratings agency, has warned of lowering the U.S. credit rating if the debt limit issue is not resolved soon.

With the U.S. economy still struggling from the global economic downturn of 2008, housing market soft, and persistent high unemployment rate, finding a solution to the national debt crisis is more important than ever. However, the bitter truth is that it doesn’t seem to be getting resolved anytime soon.

This article is provided courtesy of Credit Season, a consumer finance website providing access to personal loans and other personal credit services.