It's most probably not much on the minds of most Americans at this time, but with our current federal government debt and large budget deficits, we have a major fiscal problem facing the country which requires serious corrective actions that will have a big impact on virtually all of us, as well as on the whole world economy.
In brief, the major fiscal problem is that our U. S. government debt, commonly called the "public debt" or the "national debt," has grown a great deal in recent years in absolute terms and, more importantly, in relation to the growth of our economy as measured by our gross domestic product (GDP). This has been happening for a number of reasons, but it's largely reflected in our increasing and substantial annual government deficits, primarily the difference between government receipts and spending. Income tax collections and Social Security tax receipts have been increasingly greatly exceeded by expenditures, including especially Medicare and Medicaid, Social Security payments, and defense.
The national debt grew from roughly $2 trillion in 1980 to $5.8 trillion in 2008, and, according to the Congressional Budget Office (CBO), is projected to increase to $14.3 trillion in the next ten years, from 41% of GDP to as much as 68%. The annual deficit for the fiscal year ended 6/30/09 was more than $1.4 trillion, about 11.2% of GDP, the largest deficit as a percent of GDP in the last 60 years. As most Americans probably know, major factors in the deficit in FY 2009, aside from those related to our continuing huge social programs, were the economic stimulus packages to pull us out of our deep recession, and the fast growing expenditures for Homeland Security and fighting the wars in Iraq and Afghanistan.
The major problem these developments pose is that they weaken our country financially, politically and militarily, in both absolute and relative terms. Our federal government will have to spend more and more of government receipts on making interest payments on our national debt (it was $383 billion in FY 2009) and have increasingly lower amounts available for discretionary expenses, including Defense Department money for fighting wars, Homeland Security, expenditures for environmental protection and combatting global warming, as well as energy independence. Potentially impacting our national security and foreign policy flexibility in this regard, about $800 billion or 23% of our national debt is held by China and another $750 billion or 21% by Japan.
The crisis is not something most Americans are thinking or unduly concerned about, because they are understandably much more concerned about their personal financial issues, including getting and keeping their jobs, paying the bills, avoiding home foreclosures, dealing with troubling and expensive medical issues, and trying to save for college educations for their children and grandchildren, as well as to finance their own retirements. Another contributing factor on this subject is that national fiscal issues are rather complicated and not that often discussed in the general media. Senior federal government leaders, including President Obama and his staff, while quite familiar with our fiscal problems, are preoccupied and more concerned with immediate priority issues, like managing the wars in Iraq and Afghanistan, negotiating the final terms of the pending health care reform legislation, promoting their views on financial institutions reform, preparing for mid-term congressional elections next year, and other largely partisan matters.
What can and should be done? Frankly, we're in a tough position and needed corrective actions will be quite difficult, politically very controversial, and, in many cases, not likely to be well received by much of the public. This is especially so given our high unemployment rate, the fragile state of our economic recovery, low consumer spending, state budget deficits, the continuing concern with global terrorism, and the wars in Iraq and Afghanistan with much more aid seemingly to be spent over the next few years in Pakistan. However, we need to move toward a balanced budget as quickly as possible and plan to keep the budget balanced on a continuing basis.
There are three obvious actions for the federal government to pursue: a) cut spending, b) increase taxes, and c) find more ways to eliminate waste and improve efficiency and productivity. Among relatively reasonable actions likely to be well received by most of the public: tougher negotiations with other countries to share more equally in the costs of fighting global terrorism, accelerating plans to implement exit strategies in Iraq and Afghanistan, increasing income taxes and their enforcement on the wealthy and upper level of middle income Americans, and temporarily cutting back salaries and the cost of benefits for at least the upper tier of federal employees. Another long overdue and obvious action is overhauling the IRS and greatly simplifying and streamlining the tax code and our unnecessarily complex and expensive income tax return preparation and reporting process.
Among needed actions which are likely to be unpopular to many or most Americans: reforming and cutting back the future costs of Medicare and Medicaid, imposing a hiring freeze for federal employees, substantially increasing sales taxes on gasoline to create more revenue and serve as an inducement to drive more energy efficient cars and trucks, and eliminating subsidies to agriculture/farmers and religious and most non-profit institutions. These actions should include serious bipartisan efforts to reduce the federal costs of the pending health care legislation, at least for the next three to four years until our economy fully recovers and tax receipts increase to facilitate balanced budgets.