Sometimes we are asked why we at Truth in Accounting care so much about total government debt. People suggest government debt is like our mortgages. We only need to worry about making the next month’s payment. If we can pay our bills today, why worry about tomorrow?
Well, that is certainly a nice thought. The only problem is, typically, our mortgage is backed by an asset - our house. If we lose our jobs and know we will not have income for the next year, we will have the option to sell our homes to eliminate the debt. The debt is only a debt so long as we are financially responsible for the underlying asset from where the debt originates. Once we sell the house, the debt disappears, and we move forward in whatever manner makes sense.
The total government debt we report is not like our mortgages. Our reports subtract debt that could be paid off with government capital assets before we come to the total debt owed. What debt remains in our reports is more like our credit card debt. It is debt or obligations to pay on expenditures with no financial value that the government or we can sell.
When we use our charge cards, we buy clothes, meals, travel, gas, and other things which are consumed and leave us with nothing anyone values other than us. No one wants our used clothing, furniture, or memories of our trip to Maui. We spent the money, and now we have to pay. That is what our reported government debt is, debt that is not backed by assets that have value.
The argument we often hear is that as long as the government can meet its current obligations with current revenues, we do not need to worry about the debt. But what happens when the minimum payments to fulfill debt obligations cannot be met with existing revenue streams? Furthermore, take it one step further if the government reaches its borrowing limits. What if it cannot secure more debt to pay other debt, and the current cash inflows are insufficient to pay current obligations?
Think of it this way. You get three new credit cards in the mail. You go crazy and use one to book trips to Europe, the other you buy a new closet of designer clothes, and the third is used to party on the weekends. You use these cards for 30 days, and you can make the minimum payments at the end of the month. You use them for another 30 days, and the balance keeps growing due to interest and increasing balances because minimum payments don’t touch the principle. This goes on for six months until, one morning, you wake up and realize you are so in debt that you can’t even make the minimum payments anymore. You have nothing to sell to pay off the debt - it was all for things that have no value. Do you try to take out more credit cards to use to make payments on the old cards? Do you ask your neighbors for money? What do you do?
That is the current situation with government debt. We keep borrowing and borrowing to pay our unfunded liabilities, things like pensions and other post-retirement benefits. We may have enough revenue coming in to make the minimum payments, but soon we may not. Our debt is too large, the taxpayers contributing are too few, and we have no assets to sell which are underlying this debt. What happens next? How do we sustain this borrowing and spending for things we cannot afford?
So that is why government debt is not like a mortgage. We can sell our house if we can’t afford the mortgage. That eliminates the debt. However, no one will buy our old underwear so we can pay off our credit card debt. No one will buy government debt either if the government does not have the assets or means to pay the loans back in the end.