The US Deficit: How and when does the US get out of this mess?

The US Deficit was greater than $1,000,000,000,000 in each of the last 4 years.  I have written the number in its numerical form, and not in its abbreviated form ($1 Trillion) to highlight how large a number that is.  The US government debt has increased from $9 Trillion to over $14 trillion in 4 short years, currently representing 70% of US GDP.   Without a change to taxation or spending, the debt will continue to rise.  When the debt/GDP ratio gets to unsustainable levels, interest rates will begin to rise.

The question that needs answering is how did we get here? The first side of the deficit equation is about taxes. Historically, US spending have averaged 20% of GDP while taxes have run at the 18% level.  This 2% annual deficit was considered sustainable by a majority of economists.  During President Obama's term, US tax revenues have averaged 16% of GDP.  This is related to a combination of the recession and a gradual decline in the number of US citizens paying taxes.  Current figures estimate only 50% of the US population pays taxes as compared to 66% 10 years ago. (See Chart below).                                                                                                                                                           

Source: IRS, Heritage Foundation

The other side of the deficit equation is about spending, which has averaged 25% of GDP over the last 4 years.  This is related to the combination of a weak economy and an increase in social programs and regulations. The latter suggests that a portion of the spending increase is structural rather than cyclical.

From a simplistic perspective, we need to see a decrease in spending and an increase in tax revenues, in order to drop from the current 9% gap to the historical 2% gap. Republicans and Democrats have not come to terms on how to achieve a more balanced budget.  The philosophical questions that the 2 political parties are debating is not should we reduce the deficit, but how should we close the gap between spending and revenues?  The democrats on the far left would like to close the gap entirely through increased taxes while the right wing republicans would like it to do it entirely through spending cuts.  The most practical method of bridging the gap is via a combination of spending cuts and increased revenues so that they move closer to their long term averages.

While both parties recognize what is necessary to reach a negotiated agreement, neither side wants to overtly yield in an election year.  Until we have one party firmly in control of the White , the Senate and the Congress or increased willingness to compromise between the parties, the risk remains of continued inaction.