A reminder about federal deficits and debt
The federal budget has not produced a surplus since FY2001. Reduced revenues and increased spending led to deficits in ensuing years, and the Great Recession and federal response produced deficits in FY2008-FY2010 (averaging 9.0% of gross domestic product [GDP]), which were the largest of the post-World War II era. Following a period of smaller deficits, real deficits have increased in each year since FY2015. The budget recorded a deficit of 4.0% of GDP in FY2018, which is larger than the average deficit from the preceding 50 years (2.9% of GDP from FY1968 to FY2017).
The 2018 Long-Term Budget Outlook issued by the Congressional Budget Office (CBO) in June projects that under current law, deficits will remain higher than their historical average for the next 30 years, with deficits of 5.1% of GDP in FY2028 and 9.5% of GDP in FY2048.
That is unsustainable. But so, too is the compounding probem of the federal debt:
Changes in federal debt reflect implicit policy choices concerning the distribution of government activity across generations. Debt increases in one time period constrain the choices available in later periods. Large and persistent debt levels may reduce public confidence in the government’s ability to fulfill its borrowing obligations, which could increase long-term borrowing costs.
Debt levels generally have grown in recent decades. Publicly held debt was estimated to be 78% of GDP at the end of FY2018, the highest value since FY1947. CBO’s long-term forecast projects steady increases in publicly held debt, reaching 96% of GDP by FY2028 and 152% of GDP in FY2048.
Congress also controls debt through the statutory debt limit, which constrains the amount the Department of the Treasury may borrow. The debt limit is currently suspended and scheduled to be reinstated on March 1, 2019.
The national debt, then, continues to grow like a weed. Surely this can't end well:
If the persistent federal budget deficits and growing federal debt that is projected through FY2048 are allowed to occur, this outcome would hurt the economy and constrain future budget policy. Specifically, the accrual of debt
* financed from domestic sources would reduce national saving and income in the long term, reducing investment in capital that leads to productivity growth and higher wages;
* financed from foreign sources would increase the trade deficit and the obligations to pay foreign investors future returns;
* would increase the government’s interest costs— constraining the ability of lawmakers to encourage growth-enhancing investments, such as infrastructure;
* would limit lawmakers’ ability to respond to future recessions, natural disasters, or other unforeseen events.
In some cases—such as in Iceland and Greece—large federal debt and deficits have led to financial crises where investors were unwilling to finance government borrowing without receiving very high interest rates along with commitments to sharply reduce government deficits. Although the tipping point for this type of event is unknown, the International Monetary Fund concluded the near- and medium-term risk for the United States to be low.
We're not Greece or Iceland yet. But barring a change in the political culture of spending, that fate might be unavoidable.