The US has been running deficits almost every year since the 1960s without triggering a serious financial crisis. So the conventional wisdom is that deficits don’t matter.
Many economists argue that they pay for themselves if the economic growth generated by new public spending exceeds the government’s interest payments. That feat was easier to achieve when interest rates were near zero, however. Now that rates are rising, it’s almost impossible.
PUBLIC DEBT AT HISTORIC HIGHS
Though public debt is at historic highs – more than 100 per cent of GDP across the developed world – it is stabilising in Europe but rising relentlessly in the US. With interest rates rising rapidly at the same time, the interest paid on public debt is increasing – and doing so much faster in the US.
Within 10 years, US government interest payments will exceed spending on defence and on social programmes such as Medicaid. The Bank for International Settlements says developed economies need to bring deficits down sharply in this high-rate environment or end up with more new debt than new growth. The Biden team clearly feels this advice doesn’t apply to the world’s leading economic superpower.
Through 2025, the trillions unleashed by this administration will push government spending up to 39 per cent of GDP, most of it not covered by new revenue. In other big developed economies, spending is poised to fall sharply as a share of GDP, while revenues hold up relatively well.
Under pressure from Congress last month, Biden signed the Fiscal Responsibility Act of 2023, creating the appearance of a new restraint. Despite what looks like large spending cuts of US$1.3 trillion over 10 years, the US deficit is still projected to hover near six per cent of GDP throughout the next decade.
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