Copyright 2020

October 15, 2019

How worried should you be about the federal deficit and debt?

A man walks away from the U.S Treasury Department in Washington, U.S., August 6, 2018.     REUTERS/Brian Snyder - RC1FD03EA500

The Vitals

Despite a reasonably strong economy, the federal deficit is large by historical standards and projected to rise unless Congress makes changes to tax and spending policies. Big deficits mean a growing federal debt—the total the government owes—which is already at its largest point since World War II. Extraordinarily low interest rates allow the U.S. to shoulder a heavier debt burden, but the debt is on an unsustainable course and its size may limit the government’s ability or willingness to fight the next recession with tax cuts or spending increases.

  • Despite the strength of the U.S economy, the federal government’s budget deficit in 2019 — $984 billion or 4.6% of GDP – was larger than any year since 2012.
  • The federal debt, measured against the size of the economy, is larger than at any time since the end of World War II and is rising.
  • Low interest rates make borrowing less burdensome to the U.S. government today, but the huge debt means interest payments are claiming an ever-larger share of government spending.

A Closer Look

What is the federal deficit?

The deficit is the difference between the flow of government spending and the flow of government revenues, mainly taxes. For fiscal year 2019, which ended September 30, 2019, total revenues were $3.5 trillion (up 4% from the previous year) and total spending was $4.4 trillion (up 8% from the previous year.)  The resulting deficit was $984 billion compared to $779 billion in the previous year.  The Congressional Budget Office projects that the deficit for fiscal 2020 will be just over $1 trillion.

Is that deficit considered large?

Well, $984 billion is a lot of money. Economists gauge the size of a government’s deficit by comparing it to the size of its economy; obviously, $984 billion is very different in a small economy, say Portugal, than in a big one like the U.S.  And because of inflation, $984 billion today is very different from $984 billion in 1969.

In fiscal year 2019, the federal deficit amounted to 4.6% of gross domestic product (GDP), the value of all the goods and services produced in the U.S. in a year. By international norms, that’s not huge, but deficits over the last 50 years have averaged a much smaller 3% of GDP.  The deficit hit 9.8% of GDP in fiscal 2009 during the worst of the Great Recession, then shrank for several years as the economy improved (more people working and paying taxes and fewer people collecting unemployment benefits and the like), Congress was tight-fisted on the spending it appropriates annually, and taxes were raised a bit on upper-income Americans.  Even though the economy has been reasonably strong lately, the deficit has been growing, largely because of the big 2017 tax cut which was not accompanied by any significant spending cuts.

A deficit of 4.6% is large by historical standards for an economy so close to full employment. As the chart below shows, the deficit is projected to stay around this size for a few years and then grow steadily. Without a change in tax and spending laws, CBO projects that the next 10 years will include the first sustained period in U.S. history with sizable budget deficits at full employment – deficits that will exceed 4% of GDP and even higher if Congress extends tax cuts that are due to expire.

Deficit as a % of GDP

So what’s the debt?

The debt is the total amount of money the U.S. government owes—the sums it borrowed to cover last year’s deficit and all the deficits in years past. Each day that the government spends more than it takes in, it adds to the federal debt. When the fiscal year ended on September 30, 2019, the federal government owed $16.8 trillion to domestic and foreign investors ( a measure that includes Treasury securities held by the Federal Reserve, but not the U.S. Treasury bonds in the Social Security trust funds.). To see the very latest tally, check the Treasury’s “The Debt to the Penny and Who Holds It” website. Measured against the size of the economy, the debt today is about 79% of GDP, higher than it has ever been except for a brief period after World War II, and it is headed higher and higher.

Debt Held by the Public as a share of GDP

Is debt at 79% of GDP a problem?

For now, it isn’t. The U.S. government borrowing trillions of dollars a year at very low interest rates on global financial markets, and there doesn’t appear to be much private-sector borrowing that is crowded out by U.S. Treasury borrowing right now.

No one really knows at what level a government’s debt begins to hurt an economy; there’s a heated debate among economists on that question. If interest rates remain low, as anticipated, the government can handle a much heavier debt load than was once thought possible. But eventually private borrowing will be crowded out if the government’s debt continues to grow. Simply put, the federal debt cannot grow faster than the economy indefinitely so something has to give.

Debt at this level does limit the amount of flexibility the U.S. government has if it confronts another financial crisis or a deep recession and wants to borrow heavily, as it did during the Great Recession. It probably would be hard to add another 35 percentage points of GDP (or $7.2 trillion) to the national debt. And even if the government could borrow more in an ordinary recession, politicians might be reluctant to do so because they’ve already borrowed so much.

What about the debt ceiling?

Congress has always restricted federal borrowing. Before World War I, Congress often authorized borrowing for specific purposes and specified what types of bonds the Treasury could sell. That gave way to an overall ceiling on federal borrowing in 1917, which Congress has raised repeatedly, often with a lot of political controversy. The ceiling applies to the gross federal debt—both debt owed to the public and Treasury bonds held in the Social Security trust fund. (Economists generally focus on debt held by the public because they think the federal government is best viewed as a financial whole.) “Increasing the debt limit does not authorize new spending commitments,” former Treasury Secretary Jack Lew once said. “It simply allows the government to pay for expenditures Congress has already approved, thereby protecting the full faith and credit of the United States.”

What about the future?

If current policies persist without change—a big “if”—the Congressional Budget Office projects that deficits and the debt (as a percentage of GDP) will rise as more Americans become eligible for Social Security and Medicare, as health-care costs continue to grow faster than the economy, and as interest rates rise to more normal levels. Looking out 25 years—admittedly tricky because there’s so much uncertainty—the CBO projects that the federal debt will hit 144% of GDP in 2049 unless Congress changes tax or spending policies before then.

This Voter Vital was updated to reflect final federal budget numbers for fiscal 2019 released by the U.S. Department of the Treasury on October 25, 2019.


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