Causes Of Public Debt

It is necessary to understand the causes of public debt, if their consequences are to be resolved.

Public debt is an issue that affects the lives of private citizens as well as public corporations. Rising public debt creates problems and concerns in an economy that can cause great fluctuations in stock prices in the financial markets as well as produce prices at the supermarket. With rising public debt comes the potential for increased inflation, default risk and debt downgrades. In order to solve the problems created by increased public debt, the causes of public debt must first be understood.

Increased Government Spending

Increased government spending is the single most important cause of public debt. For years, a debate has raged over whether tax cuts or increased government spending are more at fault for rising public debt. According to the Cato Institute, federal expenditures have increased by $800 billion between 2001 and 2006 while federal revenue has decreased by only $200 billion as a direct result of the 2001 and 2003 federal tax cuts. This 400 percent increase as a result of increased government spending is proof that increased government spending is more important to rising public debt than are tax cuts. (See Reference 1.)

Increased Debt Ceilings

The United States Congress has the ability to raise the federal debt ceiling, or the amount of debt that the U.S. government can carry at any given time. (See Reference 2.) In January 2010, Congress raised the debt ceiling from $12.4 trillion to $14.3 trillion, an increase of $1.9 trillion (15.3 percent). (See Reference 3.) This ability to raise the debt ceiling, in a seemingly arbitrary fashion, is an enabler that allows the government to increase its spending, which is the single most important factor in public debt.

Increased Budget Deficits

The federal government is not bound by the Constitution to have a balanced budget. The 1974 Budget Reform and Impoundment Control Act was originally created to control deficit spending. In 1974, when the act was enacted, the U.S. budget deficit was only 0.41 percent of the U.S. Gross Domestic Product (GDP). In the 2010 federal budget, the budget deficit is projected to be 10.64 percent of the U.S. GDP. (See Reference 4.) When budget deficits occur, the federal government borrows, or adds to the public debt, to bridge the gap between revenues and expenditures that is created by increased government spending. (See Reference 5.)

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