Good news: the federal budget deficit shrank by half in the fiscal year ended September 30 to a paltry $1.4 trillion. The dramatic improvement was due to the runoff of the Covid stimulus and an increase in tax revenues from economic growth. By any standard, the report was welcome as the gap between spending and income has surged over the past 30 years. But the relief (if one can call it that) is merely temporary, as without substantial spending reductions and tax increases future deficits and debt are about to rocket into the stratosphere. Perhaps this is a good time to thank our grandchildren in advance for paying our bills.
Unlike state and local governments, Congress is not required to balance its budget. In any given year, the excess of spending over collected tax revenues is called the budget deficit and is financed by issuing US Treasury bonds. (While it is theoretically possible to run a surplus, it has happened only thee times since 1970).
The national debt represents the accumulation of all prior deficits less surpluses, and now stands at a whopping $31 trillion. Of that total, $6.6 trillion is “intragovernmental” debt, owed by one department or program of the government to the U.S. Treasury in trust funds like Social Security and Medicare. The difference, around $24 trillion, is called “debt held by the public” and is the relevant measure of net federal indebtedness. This massive obligation now equals nearly 100% of GDP, or about as big as the entire U.S. economy. Only in 1946 following World War II has the debt been as high. Two thirds of this debt has been amassed since the Great Recession of 2006, and about one fourth has accumulated since the pandemic response of 2020. Note that while cutting last year’s deficit in half is laudable, we still added another $1.4 trillion to the tab.
Unlike virtually anything else in Washington, the propensity for overspending has been bipartisan. Since fiscal year 1978, the national debt has grown by $10 trillion under Democratic presidents and $17 trillion under Republicans. Spending is the great uniter.
For the past 20 years, interest rates have remained so extraordinarily low that the damage of excessive indebtedness has been minimal. That is about to change for a number of reasons and defusing the massive future debt bomb will present a critical test of leadership and political resolve.