Significance of the federal debt and deficit

The U.S. Budget for Fiscal Year 2004 was released on February 3rd.
I've just finished looking through the budget and have posted updated
graphs and tables summarizing the current and projected federal debts
and deficits.  They are located at the following URLs:

http://home.netcom.com/~rdavis2/debt40.html
http://home.netcom.com/~rdavis2/deficits.html

On the debts page, I listed the following points:

1) The gross federal debt has dropped from 67.3 to 60.0 percent of
   GDP since 1996 but is still far above the 32.5 percent of GDP it
   was at in 1981.  The relative size of the debt is more critical
   than that of the deficit since it is the debt, not the deficit,
   that we are paying interest on and have promised to pay back.

2) In a single year, the projected gross debt in 2007 has increased
   from 58.0 to 67.6 percent of GDP.  This will be its highest level
   since 1955 when the gross debt was 69.4 percent of GDP.  Similarly,
   the projected public debt in 2007 has increased from 25.1 to 36.6
   percent of GDP.

3) The foreign holdings of federal debt increased sharply from 19.1
   percent of the public debt in 1994 to 35.3 percent of the public
   debt in 1999.  It then dropped to a low of 30.3 percent in 2001
   and is now back up to 32.0 percent.

4) Even with the surpluses in 1998 through 2001, the gross debt has
   steadily increased and will continue to increase every year.  This
   is because the reported deficit does not include monies borrowed
   from government accounts.

In addition, I listed the following points on the deficits page:

1) The gross deficit reached a record level of $428 billion in 2002.
   It is projected to reach $504 billion in 2007, an increase of $207
   billion over last year's projection of $297 billion.

2) The public deficit is projected to reach a record level of $338
   billion in 2003.  It is projected to drop to $194 billion in 2007,
   an increase of $285 billion over last year's projection of a $91
   billion surplus.

3) The unified deficit is projected to reach a record level of $304
   billion in 2003.  It is projected to drop to $178 billion in 2007,
   an increase of $282 billion over last year's projection of a $104
   billion surplus.  The unified deficit is the deficit that is most
   often reported and, as the above graph shows, is very nearly equal
   to the public deficit.

The following points show the relationship between deficits and their
corresponding debts.  This is important since it is the debt that we
are paying interest on and are obligated to pay back.

4) The gross deficit is projected to reach 5.1 percent of GDP in 2003
   and decrease to 3.9 percent of GDP by 2008.  Meanwhile, the gross
   debt is projected to continue rising as a percent of GDP, reaching
   68.3 percent of GDP in 2008.  In order for the gross debt to
   stabilize at the current 60 percent of GDP, the gross deficit would
   need to stabilize at 60 percent of the projected growth in GDP.
   As GDP is projected to grow at about 5 percent from 2003 to 2008,
   the gross deficit would need to stablize at about 3 percent of GDP.

5) The public deficit is projected to reach 2.8 percent of GDP in 2003
   and decrease to 1.4 percent of GDP by 2008.  Meanwhile, the public
   debt is projected to stabilize at between 36 and 37 percent of GDP
   through 2008.  In order for the public debt to stabilize at 36
   percent of GDP, the public deficit needs to stabilize at 36 percent
   of the projected growth in GDP (about 5 percent).  This works out
   to about 1.8 percent of GDP.

The above two points are useful to keep in mind because the current
deficit is being referred to as manageable by some.  For example, the
the White House website has a Fact Sheet on the 2004 Budget posted at
http://www.whitehouse.gov/news/releases/2003/02/20030203-6.html .
Toward the end, it states:

> The FY 2004 deficit is expected to be about 2.7% of GDP, 
> manageable and modest by historical standards. It declines to 1.4% 
> of GDP by 2008. 
> 
> Publicly-held debt is 36.9% of GDP in 2004, well below average 
> post-World War II levels, and declines to 36.4% by 2008. 

As noted above, a 2004 deficit of 2.7% of GDP will cause the public
debt to increase from its level of 36.1% of GDP at the end of 2003.
Likewise, deficit of 1.4% of GDP in 2008 will cause this percentage
to drop.  However, no mention is made of the gross deficit which is
projected to reach 5.1% of GDP in 2003 and drop to 3.9% of GDP by
2008.  This will cause the gross federal debt to continuing growing,
increasing from the current level of 60% of GDP to 68.6% of GDP by
2008.  This will be the highest level since 1955.

We should be focusing on the gross debt and deficit because, unlike
the unified deficit and public debt, these account for the cost to
the government of redeeming the bonds held by the trust funds.
The Social Security and Medicare trust funds, at least, will start
redeeming those bonds when the Boomers begin to retire.  Even after
redeeming these bonds, those trust funds are projected to run out of
funds by 2041 and 2030, respectively.