Deal or no deal, US debt problems linger

With the possible passage of a "mini" grand bargain to resolve the D.C. deadlock, political leaders on both sides of the aisle will be kicking the can down the road.

Limited success for a Senate compromise bill would address twin federal woes: A government shutdown since Oct. 1 due to congressional inability to pass a budget for the 2014 fiscal year and a rapidly approaching Oct. 17 loose deadline for the debt ceiling.

The agreed-upon bipartisan deal could extend the Treasury's borrowing authority until February, thereby setting a new cap above $17 trillion. It would also re-open the government and send furloughed employees back to work through the beginning of next year.

Republicans are poised to gain a delay in the start of the employer reinsurance tax included in the Affordable Care Act, while Democrats aim for more flexible and reduced sequester cuts — all part of a long-term plan that could take shape by December.

But without such an agreement, the Treasury says the country could face catastrophic results: "Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world."

Al Jazeera looks at some of the questions at the heart of ongoing fiscal uncertainty:

Has the U.S. ever defaulted on its debt?

Contrary to statements by politicians and financial leaders, the Treasury has indeed failed to meet its obligations before.

In 1814 and 1979, there were two relatively contained examples of U.S. default on sovereign debt.

The first was during the War of 1812, when the capital was on fire and U.S. troops were fighting unpaid. The second occurred at the end of the turbulent 1970’s, when a bureaucratic glitch prevented the federal government from paying $122 million in  Treasury bills, costing taxpayers billions.

Bond markets panicked at the “delay” in payments, which investors unambiguously labeled a “default.” There were two additional debatable defaults involving late 18th century war debts and the transition from the gold standard in 1933.

The financial disaster predicted by economic analysts for the coming weeks could dwarf the prior default episodes — and the near-default shock of 2011, after which the U.S. credit rating was downgraded and the market tanked.

Is deficit reduction the real political issue?

The good news this year is that the budget deficit is only 4 percent of gross domestic product (GDP), down from a high of 10 percent after the financial crisis in 2009.

The 2013 deficit -- the amount that annual U.S. government revenues fall short of outlays -- totals around $700 billion, since taxes came in higher than expected.

Thus, the public debt ordinarily would have jumped by that amount, as the country borrowed to finance fresh expenditures.

Under current sequestration law, the deficit is expected to continue shrinking through 2015.

However, deficits are then set to rise again, which the Congressional Budget Office (CBO) attributes to “the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance and growing interest payments on federal debt.”

Defenders of President Barack Obama’s economic record attribute high recent deficits to a recession worse than any since the Depression.

After bailing out failed banks and undertaking a massive stimulus effort, the deficit climbed to historic levels unseen since the aftermath of World War Two. This came on the heels of huge wartime spending under George W. Bush.

Will the U.S. budget ever return to the black?

The late 1990’s saw a surplus, following a balanced budget and sustained prosperity.

Today there is fundamental disagreement about how to pay for the future and a genuine lack of consensus about national priorities. "Obamacare," the main bone of the shutdown showdown between Democrats and Republicans, is just one of several key items. The dispute also focuses on tax rates, discretionary spending and mandatory programs.

Joshua Gordon, policy director at the non-partisan Concord Coalition, says that a “pragmatic” approach is best.

“But this may not be the best word because it doesn’t work so well right now,” Gordon says. “You assume that both sides need to give something in order to complete negotiations.”

Many Republicans argue that the growth of Social Security and Medicare should be curtailed to shore up the long-term fiscal health. While most Democrats would not back aggressive attempts to dismantle the safety net, the Obama administration hopes to address ballooning entitlement and interest costs.

At around 30 percent of the federal budget, discretionary federal spending (i.e. on the military, education and the environment) is headed toward the lowest share of GDP in more than 70 years.  But many legislators from both parties are uncomfortable with the severity of cuts for the Defense Department.

A CBO report last month predicted that by 2038 medical costs would skyrocket from 4.6 percent to 8 percent of GDP. In the same 25-year period, the number of people projected to receive Social Security benefits would nearly double to 100 million. And the debt is slated to reach 100 percent of GDP by then, with the deficit at 6.5 percent of GDP.

The debt-to-GDP ratio was at 36 percent in 2007 but has more than doubled to 76 percent for 2014.

The political debate hinges on whether the government should implement more cuts now or resort to much steeper cuts later on.

After President Obama’s perceived January victory in implementing tax increases for higher earners, Republicans are loathe to back the Democrats’ preference for rate hikes and minor entitlement cuts. Instead, they seek much more drastic reduction in long-term entitlement spending.

Due to the sequester, the deficit (and thus the national debt problem) will improve for the next half-decade, assuming that Congress, the political body vested with the Constitutional power to increase the debt ceiling, fulfills its duty. But any surplus is highly unlikely for now.