Presidential Decisions for Gazette Readers: Budget Deficit and National Debt ( Published February, 2020 in Daily Hampshire Gazette)
For purposes of this column, you are the recently inaugurated President of the United States (POTUS). You are about to receive a briefing about the annual budget deficit and the national debt.
Madam/Mr./ Mx. President.
Here is a summary of the situation: The Fiscal Year 2020 federal budget was 4.7 $ trillion The US government estimates it will receive $3.6 trillion in revenue. Therefore there is a budget deficit of about $1 trillion which must be met by borrowing money.
The national debt, the sum of all past deficits, is about $23 trillion including both public and intra-governmental debt. Over the next decade, the Congressional Budget Office (CBO) projects the debt will rise to roughly $31 trillion. This level of debt is not sustainable. According to the World Bank, a healthy ratio of debt-to-Gross Domestic Product ( a country’s total economic output) should be 77% or less. As a share of Gross Domestic Product, the US gross debt headed to 110 percent of GDP by 2027 according to the CBO.
To help you see the impact on the national debt of any budget decisions you make, there is an online tool at http://www.crfb.org/debtfixer for you to use
Government spending is broken down into three categories: Mandatory is about $2.8 trillion. This includes Social Security, Medicare and Medicaid. Discretionary spending is forecast to be $1.4 trillion. Of this, more than half goes toward military spending, including the Department of Veterans Affairs and other defense-related departments. The third category is interest on the national debt, $479 billion for the most recent year.
The annual deficit/ accumulated debt are a critical problem. There are at least four reasons:
First, Federal Reserve chair Jerome Powell, in his assessment of current US debt levels has said that “the federal budget is on an unsustainable path” that could “restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.” Dealing with an as yet unbudgeted event, like dealing with climate change, would face a similar problem.
Interest on the national debt will itself be a major factor. The Petersen Foundation, citing CBO data, projects that interest payments will grow rapidly, rising rising to $914 billion in 2028. Overall, net interest costs by themselves will total nearly $7 trillion over the next decade.
Second, as government debt piles up, it increasingly crowds out private investment. This weakens productivity growth, which is a major source of higher living standards.
Third: There is no guarantee that there will always be a pool of lenders willing and able to lend the US money at the current low rate ( about 2% on a 10 year Treasury bond). The rest of the world has its own debt problems. According to the International Monetary Fund’s Global Debt Database total global debt (public plus private) reached $188 trillion at the end of 2018.
Fourth: If huge budget deficits subvert global confidence in the dollar — causing investors to dump our currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.
To reduce the annual deficit you would need to cut expenditures and/or increase taxes. To erase a $1 trillion annual deficit through spending reductions only, you would have to cut discretionary expenditures by 70 percent.
What about increasing revenue? Theoretically closing “loop holes” is an option. Unfortunately, many loopholes have popular support. An example is Employer-Paid Health Insurance Benefits. They are not taxed, which cost the Treasury over $200 Billion a year. However, about 150 million Americans have their health insurance through their employers and would wouldn’t consider something that benefits them a “ loop hole” that should be closed.
In principle ,there are a number of other revenue raising options. This would include repealing the Trump tax cuts, significantly raising marginal income tax rates and increasing the base income on which Social Security tax can be levied. Although people may favor raising taxes on someone else, they resist raising taxes on themselves.
Madam/Mr./Mx. President, the annual deficit and increasing debt were not major topics in the most recent presidential election. The public has not been prepared to understand the gravity of the situation or the sacrifices required to confront it . What’s more, American consumer debt is about $14 trillion. Faced with their personal debt problems citizens are not likely to be concerned about the national deficit/ debt situation
You will need to decide if you want to make the deficit/debt problem a major focus of your Administration. If you do, you will need to have plans to cut expenditures and increase revenue. That will require expending so much political capital that your other public policy priorities will be in jeopardy. On the other hand, if you don’t, you will be leaving the country vulnerable to a massive financial and economic crisis.
Gazette readers, if you were the president, would you make the deficit/ debt problem a major priority of your Administration?
If “yes”, what specific actions would you take? Which social welfare programs are you willing to cut? How much of an additional tax burden are you willing to impose? Don’t forget to include an increased tax burden on yourself.
If “no”, are you willing to accept our nation’s limited ability to address an economic downturn, huge climate change expenses or other currently unbudgeted challenges that may occur in the next decade?