Chief Economist Scott Brown discusses current economic conditions.
Treasury reported a federal budget deficit of about $2.8 trillion (about 12% of GDP) for FY21. Barring a major unforeseen event, the deficit will fall considerably next year. By itself, that will be a negative for GDP growth, but a further strengthening in private- sector demand should more than offset that. Meanwhile, production bottlenecks, supply chain issues, and tight labor market conditions have continued to add to inflation pressure, altering the intermediate-term outlook for Fed policy. On Thursday, the Bureau of Economic Analysis will report the advance estimate of 3Q21 GDP growth. Details of that report will help to gauge the strength of the economy in the near term.
The budget deficit for FY21 (which ended in September) was $2.772 trillion (12% of GDP), down from $3.1 trillion (15% of GDP) in FY20. In July, the Congressional Budget Office projected that the budget deficit would fall to $1.1 trillion in FY22 (about 4.6% of GDP, which is about where we were before the pandemic). That doesn’t include the infrastructure bill, although additional spending would be spread out over time. As with the response to the 2008 financial crisis (when the deficit rose to 10% of GDP), the deficit will fall as the economy recovers.
At the end of September, the national debt stood at $28.4 trillion, about 120% of Gross Domestic Product. Debt is what economists call a stock ($), while GDP is a flow ($ per time), so there’s not much meaning in that comparison (other than as a benchmark). Of the national debt, $22.3 trillion (about 98% of GDP) is marketable debt (debt held by the public), while $6.1 trillion is debt that the government owes itself (Social Security and Medicare Trust and government retirement funds). Over the next few decades, much of the intergovernmental holdings will become marketable debt as the government taps into the Trust funds.
The government is not like a household or business. The federal debt does not need to be paid off by our kids and grandkids. In fact, since Treasuries are the benchmark for the global bond market, we wouldn’t want to have zero government debt. We only need to be able to roll over debt and make interest payments. No problem there. The last time borrowing was a concern was in the late 1980s and early 1990s (Japan was a big buyer of U.S. debt and started to balk, sending bond yields higher -- Presidents Bush the first and Bill Clinton signed legislation to reduce the budget deficit and bond yields fell). Economists’ attitudes toward the deficit have evolved. The current view is that there is a lot more leeway in running deficits. The budget deficit and federal debt do not cause inflation. However, fiscal stimulus adds to demand and supply is currently constrained.