Unsustainable Fiscal Path: 1. Growing Federal Debt & Deficits

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In fiscal year 2017, the federal government’s audited expenditures exceeded its revenues by $1.56 trillion. If you adjust this for non-cash accruals and other accounting differences, the 2017 budget deficit, which is a better measure of the deficit on a cash basis, was $666 billion.

The deficit is budgeted to grow to $835 billion in 2018 and almost $1 trillion by 2019.

The US government hasn’t had an annual budget surplus since 2001. Federal debt now stands at a whopping $20.8 trillion, representing 105.4% of US GDP. The only time US government debt was at this level was the end of World War II.

Never in the history of the country has peacetime debt been so high.

The next three articles in The Informed Vermonter will discuss the government’s fiscal deficits, review the government’s debt and other liabilities and assess the risks and possible implications of ever growing debt levels.

Before moving ahead, a few words on measuring the deficit and debt of a government. Gross Domestic Product (“GDP”) is a proxy for the income stream available to a government to support any debt it incurs. As GDP increases or decreases, tax revenues available to service debt tend to increase and decrease is step. Throughout this series of articles, the ratio of debt or the deficit to GDP will be used to measure the country’s debt burden.

A Bit of History

 Throughout most of its history, the US government was a prudent borrower. Basically, it would borrow money to fight wars and then repay it. All this changed in 1980, and with a few brief exceptions, the government has been relying on deficits and debt since then.

The 13 colonies incurred debt to fight the Revolutionary War. Under the leadership of Alexander Hamilton, this debt was fully absorbed by the federal government. All this debt was fully repaid by 1830 and by 1835 the US had no debt at all.

The Civil War resulted in renewed government borrowing on a large scale. By the end of this war, federal government debt stood at 35% of GDP. This was largely repaid by the end of the 19th century.

World War I caused the next increase in debt. Government debt climbed to about 32% of GDP. After the war, successive administrations cut the debt, particularly Presidents Harding and Coolidge. By the mid-1920’s, government debt had been reduced to below 20% of GDP.

The Great Depression reduced tax revenues and both President Hoover and President Roosevelt increased government spending in an effort to turn the ship around. By 1940, government debt to GDP had reached 43% of GDP.

World War II was a watershed moment for US fiscal policy. Unprecedented levels of government debt were issued to finance the war effort. At the end of the war, in 1946, US debt to GDP was 119%, thus far an all time high.

Following WWII, US debt to GDP declined for 35 consecutive years. America had a post-war boom (the industrial base of all major competing countries had been largely damaged or destroyed) and tax revenues were strong. Both the Korean War and the War in Vietnam were effectively financed with tax revenues. By 1974, government debt to GDP hit 29.6%. This was the post-war low.

In 1980 came President Regan, massive tax cuts, massive increases in military spending and massive government borrowing. By 1988, government debt to GDP had increased to 48%. Under President George H. Bush, this ratio climbed to 61%.

When President Clinton took over, the Republicans, led by Newt Gingrich, successfully made the growing deficit a hot political issue. This led to fiscal discipline and government budget surpluses. By 2000, government debt to GDP had been reduced to 54%. As it turned out, 2001 was the last year the government had a budget surplus.

When George W. Bush became President, the Republican Party concerns about the deficit seem to have evaporated. Tax cuts, Medicare Part D, wars in Afghanistan and Iraq and the bank bail-out in 2008 caused government debt to almost double: from $5.7 trillion in 2000 to $10 trillion in 2008. Debt to GDP at the end of 2008 was 69%.

The US government debt almost doubled again under President Obama. The 2008-2009 financial crisis caused a deep recession and tax revenues declined. The American Recovery and Re-Investment Act pumped billions into the economy and bail-outs, like GM, also required funding. In the face of these expensive recession response measures, the Obama administration also passed the Affordable Care Act, adding many billions to the cost of Medicaid. At the end of 2016, US government debt stood at $19.7 trillion representing 104% of GDP.

During the Obama administration, the government ran fiscal deficits exceeding $1 trillion every year from 2009 to 2012. Beginning in 2013, they managed to reduce the deficit sharply and by 2015 it was down to $438 billion.

In 2015, Congress reinstated a number of corporate tax preferences that had expired on a retroactive basis. This resulted in a large reduction in corporate tax revenues, which caused the budget deficit to gap to $585 billion in 2016.

Going Forward

The new administration in Washington has decided to increase government deficits and debt by way of spending increases combined with large tax cuts. As noted above, federal government debt (excluding pension liabilities) now stands at almost $21 trillion and the budget for fiscal year 2019 has a $985 billion deficit.

Each reader’s share of the current national debt is about $65,000. If you are a family of four, your share of the debt is $260,000. To put this in some perspective, the median home value in the country is only $184,700.

So, how much is too much? In the next article The Informed Vermonter will review all the debt and liabilities of the federal government and its cost. After that, the potential perils of excess indebtedness will be discussed.

 

 

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