The Informed Vermonter has long wondered when the country would begin to worry about consistent and unsustainable federal deficits and the resulting mountain of debt.
When the country voted in 2016 for Republican majorities in both houses of Congress and a Republican President, it was knowingly voting for increased deficits and more government debt. These voters were not disappointed. By cutting taxes AND increasing spending, the deficit has grown from $438 billion in fiscal year 2015 to $984 billion four years later, a 125% increase!
From a pure fiscal perspective, the federal government has never been more poorly prepared to deal with a national crisis.
As of March 2020, the federal debt held by the public reached $23.2 trillion, representing 107.8% of US Gross Domestic Product (GDP). This is the highest level of debt both in absolute terms and relative to GDP in the country’s entire history. The previous high was in the middle of World War II, when debt to GDP hit 106%.
As of March 2020, only six months into fiscal year 2020, the federal deficit stood at $625 billion, or $1.25 trillion on an annualized basis. Then came coronavirus!
Massive Stimulus Spending
What happens when you combine a national emergency with an election year? Both parties in both houses of Congress and the President sign into law the largest peacetime spending packages in history.
There have been four major coronavirus spending bills, including the Families First Coronavirus Response Act and the landmark CARES Act, all of which have been reviewed in previous Informed Vermonter articles. In total, excluding $590 billion of tax cuts included in the CARES Act, these bills call for some $1.7 trillion in new and additional spending. Most of this money will be spent in the fiscal year ending September 2020, but a fair amount will carry into the next fiscal year as well.
In the months of April and May 2020, federal government outlays were up 30% on a year-over-year basis. In May alone, Unemployment Insurance Expenditures went from $2 billion in 2019 to $93 billion in 2020. Small Business Administration outlays went from $98 million to $35 billion. These are but two examples.
Massive Decline in Tax Revenues
As noted above, the CARES Act included $590 billion of tax cuts. Some $290 billion of this paid for the stimulus checks sent to low and middle-income families across the country. The balance went to businesses and wealthy individuals.
In addition to reducing taxes by changing the tax code, taxes will be going down with incomes. The personal income tax is the single largest source of revenues for the federal government. As incomes decline as a result of the COVID-19 shutdowns, tax revenues will decline as well. During the months of April and May 2020, federal revenues were down 25% on a year-over-year basis.
The Biggest Federal Deficit Ever
So, with expenditures up 30% and revenues down 25%, the federal deficit is exploding. As of May 2020, the year-to-date deficit stood at $1.88 trillion. The Congressional Budget Office is forecasting a full fiscal year 2020 deficit of $3.7 trillion and a 2021 deficit exceeding $2 trillion! All of these deficits will be funded with debt, which was already at its highest level EVER before coronavirus.
Prior to the COVID-19 crisis, the US government’s fiscal position was already in nosebleed territory. The debt to GDP ratio was the 11th highest in the world. Of the major economies, only Japan and Italy had higher ratios. Other countries in the high debt club include Greece, Lebanon, Cape Verde, Angola and Mozambique. Countries like Jamaica, Congo, Djibouti and Argentina all have lower debt/GDP ratios. You get the idea.
After COVID-19, the US numbers will be worse…much worse. The national debt will grow to something like $26 trillion by September 2020, representing almost $80,000 for every man, woman and child in the country! Unless major changes are made in Washington, deficits will continue to be large and the debt will continue to climb.
Here are a few questions to ponder as you vote this November and in future elections.
- Is the USA going broke? How long can we finance ourselves on deficits?
- What will happen if COVID-19 (or another pandemic) gets much worse?
- Could the USA afford to fight WWII now?
- Have we betrayed our children and sold them down the river?
Until Ronald Regan came along, the federal government would only increase deficits to finance wars. In peacetime, deficits were eliminated or greatly reduced. Since 1980, increased deficits have been more the norm than the exception. So, maybe all the politicians that served in Washington for the first 200 years of our history were wrong and these modern guys are geniuses. Then again, maybe not.