Funding Entitlements With An Ever Increasing Government Debt Burden

by: David I. Templeton, CFA

In an attempt to add some perspective to the issues influencing the stalemate in Washington, DC, one overriding issue is the rate of growth of the federal government's debt; hence, the fast approaching debt limit. Driving the government's seemingly ever increasing debt level is entitlement spending. Charles Hugh Smith recently wrote an article that focused on the growth of entitlement spending in the U.S. titled, Have We Reached Peak Entitlements?. His article is a worthwhile read. The result of continued growth in this expenditure category is the growth in the government's debt level. The consequences of not gaining some control over this spending will likely be a lower quality of life for the younger generation.

To put this in perspective, they say a picture is worth a 1,000 words so the below charts provide a snapshot of the government's debt along with current government receipts and expenditures. The first chart shows the absolute dollar level of receipts and expenditures for the federal government. In spite of the much maligned, by some, sequestration cuts, the actual dollar level of expenditures has really not declined by much. On the other hand, government receipts now surpass the level where they stood prior to the financial crisis.

From The Blog of HORAN Capital Advisors

Some will say this is not a fair representation of how one should look at the revenue/expenditures of the government. A fairer way should compare this to the level of economic activity or GDP level. In that regard, the gap remains quite large.

From The Blog of HORAN Capital Advisors

The last two charts display the absolute debt levels for the government. This is the significant issue that has driven a wedge between the two parties in Congress and the debt limit being reached on October 17th. The first chart is the actual level of debt, while the second chart shows the debt as a percentage of GDP. Readers / voters should note the increasing rate of growth of the debt reflected by the increasing steepness of the curve's slope. Just as the law of compound interest favors long term savers, this same law will make it increasingly difficult to repay / reduce this debt as long as the can continues to be kicked down the road.

From The Blog of HORAN Capital Advisors
From The Blog of HORAN Capital Advisors

As Charles Smith's article shows, we may have reached peak entitlements. Maybe it isn't the fact the Affordable Care Act (ACA) isn't well intentioned. It is more the question of what is the best way to provide healthcare to the uninsured and how is this new entitlement funded. Is this a program better run by the government or the private sector? Smith's article shows the high hurdle facing continued growth in entitlements of which the ACA is another add on and yet to be reflected in the balance between the government's revenues and expenditures. In my view, opponents of the ACA have not clearly drawn this connection. And proponents of the ACA have not clearly addressed the funding side of this new entitlement, as well as existing ones.

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