Drowning in Debt: What the Nation's Budget Woes Mean for You Economists predict cutbacks and tax increases that 'aren't even imaginable.'

WASHINGTON, Feb. 17, 2010 -- American political and economic leaders have sounded the alarm for years about the red ink rising in reports on the federal government's fiscal health.

But now the problem of mounting national debt is worse than it ever has been before with -- potentially dire consequences for taxpayers, according to a report by the nonpartisan Peterson-Pew Commission on Budget Reform.

"It keeps me awake at night, looking at all that red ink," said President Obama in Nashua, N.H., on Feb. 2. "Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities."

Obama will sign an executive order tomorrow that establishes a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how to reduce the country's debt.

Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country's entire economic output, or gross domestic product.

Even more alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic shift in course.

"Within 12 years…the largest item in the federal budget will be interest payments on the national debt," said former U.S. Comptroller General David Walker. "[They are] payments for which we get nothing."

Economic forecasters say future generations of Americans could have a substantially lower standard of living than their predecessors' for the first time in the country's history if the debt is not brought under control.

Government debt, which fuels the risk of inflation, could make everyday Americans' savings worth less. Higher interest rates would make it harder for consumers and businesses to borrow. Wages would remain stagnant and fewer jobs would be created. The government's ability to cut taxes or provide a safety net would also be weakened, economists say.

While much attention has been focused on the government's deficit-spending surge during the recession, many economists agree short-term budget overruns -- as ominous as they may seem -- are not particularly problematic.

"What threatens the ship are large, known and growing structural deficits," said Walker, a problem that few politicians seem eager and readily able to fix.

In a recent ABC News poll, 87 percent of Americans said they are concerned about the federal budget deficit and national debt, and most strongly disapprove of how their political leaders are handling the situation.

But public dissatisfaction has not proven enough to compel members of Congress or current and previous Administrations to set aside their partisan differences to achieve a balanced budget.

Most Republicans don't want to raise taxes; most Democrats don't want to cut spending. The result is a stalemate on how to put America back in the black.

Partisan Gridlock Stalling 'Drastic Changes' Needed

Politicians "don't have a way to say 'no'" to their constituents, said Doug Holtz-Eakin, a conservative economist and former director of the Congressional Budget Office, who says unrestrained government spending is the crux of the problem.

John Podesta, former Clinton White House chief of staff and president of the liberal Center for American Progress, says lawmakers need to raise more tax revenue as part of the solution to fund "investments" for the future.

Ultimately, analysts say, solving the debt problem will likely require both tax hikes and spending cuts, along with broader structural reforms of the way government operates.

"Habitually spending more money than you make is irresponsible," said Walker. "Irresponsibly spending someone else's money when they're too young to vote or not born yet is immoral."

Future generations of Americans will largely foot the bill for the present financial predicament, economists say.

The United States currently owes over $12 trillion to its debtors – that's more than fifteen $787-billion economic stimulus packages worth of cash. Divided out, each American bears a $40,000 share of the country's tab.

"The American people today are not remotely prepared for the changes that are necessary," said former Congressional Budget Office director Rudolph Penner.

He says Americans who have been accustomed to buying on credit and living beyond their means at home may soon face a painful reality as the government tightens its belt further.

"They aren't hearing about the drastic changes needed, and they certainly didn't hear about it in the President's budget," Penner said.

President Obama's $3.8 trillion budget request for 2011 represents an increase in government spending by more than $100 billion over last year, yet projects slight decrease in the budget deficit over the year before to $1.267 trillion.

While deficit spending is widely regarded as a necessary evil during times of recession to revive and stimulate the economy, the President has acknowledged it's time to rein in that practice.

Obama has touted as "steps forward" both a proposed freeze on some discretionary spending in fiscal year 2011 and the creation of a bipartisan fiscal commission to make recommendations for long-term deficit reduction.

"The president has taken a very bold act," said White House economic adviser Christine Romer on "Good Morning America" today. "He has said we want a non-security dscretionary spending freeze that is pretty unpopular with his own party, but he thought it was important to make one of those tough choices."

Federal Deficit: 'Paygo' as Solution?

On Saturday, the president also signed into law new "pay-as-you-go" rules, which require lawmakers to match each spending increase with a spending decrease or a new source of revenue.

So-called "paygo" was largely credited with helping to balance the federal budget and lead to surpluses in the 1990s.

"The American people are tired of politicians who talk the talk but don't walk the walk when it comes to fiscal responsibility. It's easy to get up in front of the cameras and rant against exploding deficits. What's hard is actually getting deficits under control. But that's what we must do," Obama said Saturday.

Still, economists say that while Obama's plans may help curb deficit-spending in the near future, they don't do enough to solve the structural problems and skyrocketing expenditures of massive government entitlement programs like Medicare and Medicaid.

"The basic outline [of Obama's plan] is appropriate, but we reach out for the 'magic aspirin' in the form of a [budget] commission" and I'm just not sure if that will work, said Robert Reischauer, former director of the Congressional Budget Office and president of the Urban Institute, a nonpartisan economic research center.

The National Commission on Fiscal Responsibility, to be co-chaired by former Clinton White House chief of staff Erskine Bowles and former Senate Republican Whip Alan Simpson, will try to issue its plan by December -- after the midterm elections.

For now, the presidential commission may be the best politically-gridlocked Washington can do until lawmakers from both parties demostrate a more vigorous willingness to tackle an ever-ominous fiscal problem.