Budget & Tax

J. Scott Moody | March 11, 2009

Feds can't bail us out forever

J. Scott Moody

Posted by J. Scott Moody (OCPA Research Fellow)

State and local government officials are delirious with joy over the federal stimulus package. It is as if they won the lottery. The mood for taxpayers, however, is much more somber. Taxpayers know that it matters little to their pocketbooks whether it is state and local governments picking their pockets or if it is Uncle Sam. In any case, taxpayers will foot the bill.

Yet, state and local government officials should not party too long. They too will soon realize that the federal government simply will not be able to bail them out forever. In fact, the day of reckoning is much closer than most want to admit.

This blog post is the first of several that will look more deeply into federal finances. The data are very worrisome. First, lets take a look at the size of federal debt.

Federal Debt

This is an important place to start because for a long time now the federal government has effectively been borrowing on behalf of state and local governments. This is particularly troubling because so many states (including Oklahoma) have balanced budget requirements. The federal government does not have such constraints.

So if the federal government runs a budget deficit and then sends that money to the states, the federal government is essentially nullifying the intended effect of the state-level balanced budget requirements. After all, money is fungible.

However, this cannot go on forever since even the ability of the federal government to borrow is not infinite. The nearby chart shows the federal debt as a percent of Gross Domestic Product (GDP) as projected by the Obama Administration. In 2008, federal debt represented 70 percent of GDP. Yet, by 2019, federal debt is projected to represent over 100 percent of GDP -- an increase in the share of over 43 percent!

Not surprisingly, much of the run-up in debt occurs between 2008 and 2011, thanks to the stimulus package. However, since it is projected that the federal government will continue to run a budget deficit in every year up to 2019, the share of federal debt to GDP continues a slow ascent until breaking the 100 percent of GDP barrier in 2019.

No one know for sure just how much the federal government can continue to borrow before investors get indigestion from buying too many Treasuries. Unfortunately, this data suggests that we may just find out.

J. Scott Moody

OCPA Research Fellow

OCPA research fellow J. Scott Moody (M.A., George Mason University) serves as chief executive officer of State Budget Solutions. Formerly a senior economist at the Tax Foundation and a senior economist at the Heritage Foundation, he has twice testified before the Ways and Means Committee of the U.S. House of Representatives. Moody is the co-creator of the Tax Foundation’s popular “State Business Tax Climate Index.” His work has appeared in Forbes, CNN Money, State Tax Notes, The Oklahoman, and several other publications. This article is an updated version of an analysis published in 2008.

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