In this April 29, 2020 file photo, a sign displaying the size of the national debt is shown along an empty K Street in Washington.Andrew Harnik/The Associated Press
Remember when Donald Trump promised to eliminate the U.S. federal debt within eight years?
The assertion, which he made while running for the Republican presidential nomination in 2016, was laughable then. But no one could have predicted just how badly Mr. Trump would manage his country’s finances. Not only has the federal deficit surged since the previous election, this President has put the U.S. government debt on its fastest-rising trajectory since the Second World War.
Mr. Trump’s fiscal recklessness would be a ballot question in the presidential election were it not for, well, everything else. Seemingly more urgent issues, from the pandemic itself to the nomination of a new Supreme Court judge and racial unrest, have dominated the campaign. But a postelection budget reckoning faces whoever wins in November.
Massive tax cuts passed by Congress in 2017 were already adding hundreds of billions of dollars to the annual federal deficit before COVID-19 struck. But the pandemic has upended all previous budget estimates, pushing debt levels into the stratosphere, with unpredictable consequences.
On Monday, the U.S. Congressional Budget Office (CBO) projected the U.S. federal debt held by the public would hit 98 per cent of gross domestic product at the end of the 2020 fiscal year on Sept. 30. That is up from 79 per cent in 2019, and 70 per cent when Mr. Trump took office, as short-term spending measures to tackle the pandemic sent the deficit to US$3.3-trillion this year alone. At 16 per cent of GDP, this year’s deficit outpaces all previous annual shortfalls since 1945.
The CBO predicted the debt-to-GDP ratio will hit 107 per cent by 2023, surpassing the previous record of 106 per cent set in 1946. But while heady postwar economic growth rates helped cut debt in subsequent decades – the debt-to-GDP ratio had fallen to 35 per cent by 2007 – the CBO on Monday slashed its estimate of average GDP growth to 1.6 per cent annually between now and 2050. That is down from the 1.9-per-cent annual growth projection it set just last year.
As a result, the CBO revised its debt-to-GDP estimate upward to 195 per cent by 2050. That is a full 45 percentage points higher than the budget watchdog projected only a year ago.
“The fiscal path over the coming decades is unsustainable,” CBO director Phillip Swagel said in releasing his office’s latest projections. “There is no set tipping point at which a fiscal crisis becomes likely or imminent, nor is there an identifiable point at which interest costs as a percentage of GDP become unsustainable. But as the debt grows, the risks become greater.”
U.S. debt held by the public, which will soon hit US$21-trillion, excludes the nearly $US6-trillion the federal government “borrowed” in the past from the Social Security and Medicare trust funds. Spending on those programs, which provide pension and health care benefits to U.S. seniors, now exceeds revenues from premiums and will explode over the next decade.
Medicare and Social Security are ticking time bombs with fast-burning fuses. The U.S. population is aging rapidly, with the proportion of U.S. seniors set to rise to 22 per cent by 2050, compared with 16 per cent this year. At the same time, the CBO projects the U.S. labour force will grow by only 0.3 per cent annually between now and 2050, a fraction of the average 1.4-per-cent annual growth rate experienced over the past 50 years.
For years before the pandemic, Congress has been kicking the can down the road on Medicare and Social Security reform. But without measures to either rein in spending on the two programs, or new taxes to finance their growing costs, the United States could hit a debt wall.
Budget doves still consider this a far-fetched scenario. The U.S. dollar remains the world’s reserve currency and investor appetite for U.S. Treasury bonds is as strong as ever. The U.S. government is able to borrow at interest rates hovering below 1 per cent, while the Federal Reserve has been keeping rates low by purchasing trillions of dollars worth of Treasury bonds since the pandemic began in March. Even Mr. Swagel, the CBO director, concedes the U.S. government has plenty of room to fund additional pandemic stimulus measures.
Yet, as markets begin to look beyond the pandemic, investors may grow antsy at the gridlock in Congress that has prevented legislators from tackling the deficit.
That is what happened in 2011, as the U.S. emerged from the previous recession. The failure of Congress and the White House to come to a deal on the budget led Standard & Poor’s to cut the federal government’s triple-A credit rating (to double-A-plus) for the first time ever. At the time, S&P said that the “brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective and less predictable.”
Expect similar concerns to be raised as the pandemic recedes and markets shift their focus to fiscal sustainability, rather than short-term liquidity issues.
Other pressing matters have pushed budget issues to the periphery during this presidential election campaign. That could quickly change after election day.
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