Debt Debate for Dummies: Six Keys to Understanding the Issue

—July 8, 2011 -- The American government is broke. Rather, like many American families, it uses borrowed money to operate on a daily basis. But unlike the average American, the government doesn't ask a bank or credit card company for more money; it can sell more debt on the open market and raise its own credit limit.

The government has sold debt almost since the beginning of the Republic. You can buy it in the form or Savings Bonds. Buy some here. Institutions, governments and professional investors from around the world also buy debt, but in much larger quantities. The Social Security system owns the most U.S. debt. Foreign governments, including China, own 31 percent.

With government spending and taxes key political issues, the Republicans and the Democrats cannot agree on how much more money to spend and borrow. If an individual wanted to borrow more, he would ask his bank to raise his credit limit. The government can do this by getting Congress to raise the debt ceiling.

And so White House and Congressional negotiators have been in closed-door negotiations for months trying to figure out a way to change the way the government spends money before they agree to borrow more.

Here's a simple guide to some key points of the debate:

How much money does the government owe?

The U.S. government owes more than $14.34 trillion dollars and counting. The average citizen's share of that debt is about $46,000. The government reached the legal debt ceiling on May 16, when it owed $14.29 trillion, but the Treasury Department has averted default by placing IOUs in some federal worker retirement accounts. On Aug. 2, this will no longer be permissable, according to Treasury Secretary Timothy Geithner. Congress has to approve raising the debt ceiling before then in order for the government to be able to pay all its bills.

How much more does the government need to borrow?

The figures are astronomical. The government pays more than $1 billion each day just on interest on the debt. Overall federal spending is more than $10 billion a day for all the services the government provides.

To keep up with all that spending, the nonpartisan government accountant (the Congressional Budget Office) estimates that the U.S. will add about $6.7 trillion to the national debt during the next decade. That's an increase of 47 to 50 percent in just 10 years.

Everyone seems to agree that this is an unsustainable path.

The Baby Boom generation is just beginning to qualify for Medicare and Social Security, and those programs will be overcome within decades because there aren't enough workers paying into the system to support the people retiring. CBO has said the size of the government's debt could equal what the entire U.S. economy generates within a decade.

The Budget: How much money will government spend and how much does it bring in each year?

Over the next 10 years the CBO estimates the government will spend $45.7 trillion. That includes the $25.8 trillion in mandatory spending on programs such as Medicare and Social Security and the $14.5 trillion in spending on programs that Congress appropriates each year – called discretionary spending – that makes up the rest of the federal government from the Pentagon to food stamps.

According to CBO estimates, the government will bring in some $39 trillion in revenues in the next decade. Revenues are made up of individual income tax ($19.9 trillion), corporate income taxes ($3.9 trillion), Social Security taxes ($12.2 trillion) and other revenues ($3 trillion).