The federal debt is now in excess of $14 trillion. So if the United States were to pass a balanced-budget amendment binding on the federal government, to take effect in 2012, say, the stock of debt would thereafter remain fixed at well over $14 trillion. To reduce the stock of debt outstanding, the deficit must be negative: the change in the stock of debt will be negative only if the government runs a surplus. Moreover, the government must pay interest on its outstanding debt. Recall that when the government runs up debt, it is borrowing from the general public. The debt of the government is an asset from the perspective of households: it is one of the ways in which people can hold their saving. Holders of government bonds earn interest on these assets. Look again at Table 14.4 “Federal Outlays, 2010 (Billions of Dollars)”. In the United States, interest payments on the debt amounted to $184 billion in 2005. Interest payments on the debt amount to more than half of the deficit. Balancing the budget therefore means that, once we exclude interest payments, spending plus transfers would have to be much smaller than tax revenues. If there is outstanding debt, a balanced budget means that the government must run a primary surplus.
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