Olivia and Eric R. ask: Good Morning Mitch, we would like to hear your thoughts on the ever-widening U.S. budget deficit. The U.S. seems to break new records with every crisis, and my husband and I are wondering when the chickens are finally going to come home to roost.
Mitch’s Response:
Thanks for writing, Olivia and Eric. I know your concern is shared by many other readers, especially now, so I’m glad you asked.
Let’s go over some of the hard data first. As you mention in your question, the U.S. budget deficit swelled to a record $1.7 trillion in the first half of the fiscal year – making it twice as large as it was this time a year ago. Last month alone, the budget deficit was $660 billion, which is a staggering 454% higher than it was in March 2020.
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All told, the Congressional Budget Office (CBO) estimates that the 2021 fiscal year (which ends on September 30) deficit will reach $2.3 trillion, which is actually lower than 2020’s deficit but still marks consecutive years of extraordinary spending. As a result of sharp upticks in spending, U.S. federal debt is expected to push well past 100% of GDP – levels not seen since 1945 and 1946 in response to World War II.
Reading these figures probably gives you and many readers the sense that such spending is not sustainable, and we’re destined for some sort of reckoning. I understand the concern, but my thinking is a bit different as it relates to debt and deficits. While I would agree on record-breaking deficits, every year is not sustainable, I also think the U.S. has some wiggle room with interest rates so low. Case in point: even though debt expanded by $4 trillion last year, interest payments on that debt declined by approximately 8%. All things considered, the U.S.’s borrowing costs are still very low.
Low borrowing costs are not a free pass to taking on debt in perpetuity – there are limits. But the market would signal if the borrowing had reached dangerous levels, with soaring interest rates and inflation – neither of which we have seen at this stage. As long as buyers in the global capital markets want U.S. debt – which they do – we can issue it and finance our borrowing at low rates.
The reason U.S. debt is reliable is because of the diversity, strength, and openness of the economy that underpins and supports borrowing. The U.S. has the largest, most diverse economy in the world, and global economies recognize our strengths. Consider that even as borrowing soared, tax revenue also went up (though not by nearly as much).
I’m not saying the debt and additional spending are no cause for concern. Again, I think there are limits. But I also think the U.S. has unique characteristics that put it in a very strong position to borrow, the most important of which are low borrowing costs combined with a diverse and strong – and strengthening – economy. At some point in the future, we will need to claw our way back to annual budget surpluses and scale back our debt, but I am not convinced that time is now.
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