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Forever In Your Debt
It feels much too soon, but the Federal Deficit might once again be causing problems for the US.
The federal deficit is expected to almost double this year, despite the growing US economy. Higher interest payments and lower tax revenues are largely to blame for what analysts are describing as an unprecedented trend.
Back in 2020 and 2021, the government's COVID-themed spending spree and reduced tax take saw the deficit soar to its highest ever, at $3 trillion. As the economy reopened to 2022, that fell back to a more modest $1 trillion. However, despite the US economy showing unexpected strength, the annual gap in the nation's accounts has not continued back down towards pre-pandemic levels. Instead, projections from the nonpartisan Committee for a Responsible Federal Budget suggest it will reach around $2 trillion for the fiscal year ending September 30.
Going The Wrong Way
Budget deficits typically fall when the economy is doing well, because the government collects more tax revenues, and does not have to spend so much on unemployment benefits and other measures required during a recession. This time, though, the deficit is rising during a time of economic growth.
As Harvard professor and Obama-era economist Jason Furman comments, "To see this in an economy with low unemployment is truly stunning. There’s never been anything like it. A good and strong economy, with no new emergency spending — and yet a deficit like this. The fact that it is so big in one year makes you think it must be some weird freakish thing going on."
There are several reasons for the problem, including:
- A fall in capital gains tax payments as stocks, crypto, and housing fail to repeat the gains they saw in 2021.
- An increase in (inflation-linked) Social Security payouts.
- Higher infrastructure spending.
- Higher interest bills on the national debt.
No Cause For Worry, Yet
There are no immediate concerns that the rising US debt and deficit are a problem for its economy. Demand for the dollar remains strong, and there are no signs of the US going the same way as, say, Argentina.
However, the long-term picture does give cause for thought. High deficits are becoming normalized, with some analysts expecting a $3 trillion gap every year within a decade. Moreover, there's the prospect of yet another debt-related showdown in Congress at the end of this month.
Earlier this year, a bitterly divided Congress brought the US to the brink of default, before a compromise deal was finally hammered out. This deal was supposed to guarantee funding into 2024 and avoid a repeat of that disruption. The Washington Post writes:
Democrats and Republicans for months have tried to advance a series of appropriations bills that would fund the government through the 2024 fiscal year, which begins Oct. 1. But the two parties remain vastly opposed on the specifics, with House Republicans seeking spending cuts so deep that Biden and his Democratic allies refuse to entertain them.
The GOP demands mark a sharp break with the deal that party leaders, including House Speaker Kevin McCarthy (R-Calif.), worked out with the president this spring to raise the nation’s debt limit — an agreement that was supposed to prevent another stalemate over spending this fall. Now, the Biden administration is explicitly asking Congress to adopt what is known as a continuing resolution, preserving most spending at its existing levels as negotiations proceed.
In May, the last set of wrangling over the debt ceiling saturated the news for weeks. No one can be expected to pay much attention to it this time, unless and until it becomes a problem.
Given how dysfunctional relationships between the two sides have become, we may not have to wait long.
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