Federal Debt

Chief Economist Scott Brown discusses current economic conditions.

The first of three presidential debates is set for the evening of September 29. The topics, chosen by the Chris Wallace, the moderator, will be the Trump and Biden records, the Supreme Court, COVID-19, the economy, racial tensions, and election integrity. We may hear a little about fiscal policy, but any discussion of the federal debt will likely be deferred to one of the other debates (if at all).

The federal budget deficit is the difference between tax receipts and spending. As FY20 comes to an end, tax revenues are expected to total about $3.3 trillion, while outlays are seen at double that, $6.6 trillion, leaving a deficit of $3.3 trillion. That’s a substantial increase from FY19’s $984 billion, reflecting the pandemic (a loss in tax revenue and a large increase in spending). The deficit is expected to fall as the pandemic recedes, but is expected to remain above $1 trillion over the next ten years. Despite the added borrowing, the government’s interest payments are now projected to be little more than before the pandemic (as interest rates are projected to remain low).

Scott Brown
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The federal debt is simply the accumulation of past deficits, currently about $26.8 trillion. Some of that debt ($5.9 trillion) is what the government owes itself though Social Security and Medicare trust funds and some federal retirement programs (people have been paying into these funds, but the government has borrowed against that). The rest is debt held by the public ($20.9 trillion). The proper way to think about the debt is as a percentage of GDP. This percentage is now at 100%, a level last seen at the end of World War II. The impact of the 2008-09 financial crisis and the current pandemic is similar to the two world wars, revenues fall and spending increases. The bigger problem is what lies ahead.

The demographics aren’t in our favor. The retirement of the baby-boom generation will boost spending while slower growth in the working-age population will limit revenues. Medicare is a bigger problem because healthcare inflation adds to the demographic strains. As the government makes good on the trust fund obligations, debt that the government owes itself will become debt held by the public. Foreign investors could lose faith in the U.S., weakening the dollar, but every other country faces similar pressures.

The government is nothing like a household. We don’t have to pay off the debt. We just have to make interest payments and roll over maturing debt, which is currently not a problem. The federal budget deficit was on an unsustainable trajectory ahead of the pandemic. Sustainability can be achieved by having debt grow no faster than GDP. This can be accomplished by tax changes (increases in rates or the elimination of deductions), retirement reforms (that is, cuts), increased borrowing, or some combination. However, in the near term, fiscal support will play a critical role in the economic recovery. There will be plenty of time to worry about the deficit later.

Lawmakers would be wise to consider the advice of St. Augustine, who wrote “Da mihi castitatem et continentiam, sed noli modo,” which translates as “Grant me chastity and purity, but not yet.”