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Economic Forecasts

War Spending Adds to Deficits, Slowly but Steadily

The wars in Iraq and Afghanistan have been tax-free -- and that means we'll be paying for years and years.

Spending on the wars in Iraq and Afghanistan after nine years of fighting totals around $1 trillion. Whether or not you think those efforts are worthwhile or necessary, what is indisputable is that they are being financed through borrowing.

War spending isn’t the biggest item in the budget, but borrowing to pay for it shifts the fiscal burden to future generations, says Stan Collender, a budget analyst and a partner with Qorvis Communications. Other wars have been financed with debt, but taxes played a role, too. In his book about the history of U.S. debt, Hamilton’s Blessing, John Steele Gordon writes that as far back as the War of 1812, part of the financing for fighting involved some component of taxes, whether on commodities or on income.

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This time, we’re borrowing it all, and adding to the national debt. The costs calculated by the Congressional Budget Office include activities related to the wars such as some veterans’ benefits and some activities by the Justice Department, diplomatic efforts and aid to various countries to help fight terrorism. But the lion’s share, about 95%, goes to military operations.

These expenses will continue, though a decline in the rate of spending is in sight as the U.S. winds down its presence in Iraq. President Obama penciled in $50 billion for spending in FY 2011, but the final amount likely will be closer to the $150 billion appropriated for the current fiscal year. Later this decade, costs will hinge on the progress of fighting and nation building in Afghanistan.

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The price tag so far exceeds the nearly $700 billion, adjusted for inflation, spent on the Vietnam War, according to an analysis conducted by the Congressional Research Service (CRS). Topping the list, according to the CRS study, is $4.1 trillion spent on World War II. As the CRS points out, comparisons are tricky due to adjustments for inflation and differences in exactly which expenditures are counted. But the numbers seem reasonable.

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The gross U.S. debt, which includes pledges by the Treasury to pay back money siphoned from Social Security taxes, is now more than $12 trillion—about 88% of gross domestic product. There’s no magic number that would automatically trigger a crisis such as the one being experienced by Greece. But, Moody’s Investors Service last month published a warning to the U.S. that the nation is on a path that threatens its triple-A credit rating.

What’s the impact of a lower credit rating? While the situation is not exactly the same, Greece finds itself having to pay up to five percentage points more to sell government bonds. Were the U.S. to incur the same financial penalty, financing costs would double, and the resulting rising interest rates would result in slower economic growth and higher unemployment.

It’s too late, of course, to push through Congress some form of higher taxes to help finance the war effort. In any case, lawmakers would balk. Collender thinks the politicians don’t want to put the cost of the war on taxpayers directly—that would drum up war protests. But the cost is there, and it will be paid for, with interest.

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