When Deficits Turn Deadly
By Angela Koch, CEO of U.S. Money Reserve
If a balanced budget is fiscal Nirvana, America is clearly in the abyss. Despite a booming economy and record tax revenues, the United States is still grappling with a persistent shortfall between government spending and federal revenue. With the current budget year set to end on Sunday, the government is forecasting the largest deficit in six years.
According to recent Treasury Department data, individual income tax receipts are actually up 7% versus last year. Payroll taxes are also up, as is revenue from customs duties and excise taxes. And yet the August budget deficit was over $214 billion — pushing the total deficit for the first 11 months of the fiscal year to a whopping $898 billion, a 33% increase from a year ago.
Some are eager to blame the Trump tax cuts, and indeed corporate contributions to overall tax revenues have fallen substantially. But corporations have also created jobs, produced new taxpayers, and contributed to a spike in payroll taxes that helped push government revenues some $19 billion higher than last year. Federal spending, however, has outpaced all of these income sources.
The Congressional Budget Office (CBO) tells the tale of the tape in its monthly review for August. In the first 11 months of fiscal year 2018, total outlays were up 7%: Social Security benefits rose by $39 billion, or 5%; Medicare spending increased by $22 billion, or 4%; Medicaid spending rose by $13 billion, or 4%; military spending ratcheted up by $33 billion, or 6%; Department of Homeland Security outlays (which include disaster relief) increased by $21 billion, or an astonishing 48% — and the net interest on public debt surged a seismic 19%.
The latter number is particularly distressing since CBO is now predicting that the federal deficit will reach $1 trillion possibly as soon as next year. When deficits are accrued, we have national debt — and it needs to be financed. With interest rates now on the rise, the cost of carrying debt will continue to climb, leaving less money to invest back into the economy, less funding for social programs, and less padding for the next financial downturn.
But wait — we’re in an economic expansion; shouldn’t debt levels be decreasing? Christoph Rieger, the head of fixed-rate strategy at Commerzbank AG, raised this very concern in an interview with Bloomberg last month: “We are in an environment of an unprecedented economic experiment where the U.S. government is increasing the deficits quite strongly at a time when we are at full employment. And the sheer size of the Treasury supply numbers are so huge — if the experiment goes wrong, we are talking about a serious risk off.”
U.S. National debt is now 105% of GDP. This is not the highest in history, but we’re neither at war nor in an economic downturn. Prior to the Great Recession, U.S. debt-to-GDP was just 64%, which gave us plenty of room to borrow and finance the various bailouts and fiscal rescues that helped stabilize the economy after the recession. So what will happen during the next crisis?
If you’re not concerned, perhaps you’ve not read the latest predictions. Two thirds of experts from the National Association for Business Economists are now forecasting that a recession will start by the end of 2020. Nearly half of the housing analysts at Zillow foresee a recession in the first quarter of 2020. Seventy-five percent of the “ultra-rich” expect a recession anytime within the next two years. Hedge fund legends Paul Tudor Jones and Ray Dalio see a downturn in 2020, while Scott Minerd, Guggenheim’s chief investment officer, believes the bad times will start as soon as next year.
Deficits turn deadly when they’re left unchecked. They’re lethal to a good economy because they can cause it to overheat. They’re harmful to Wall Street because they trigger a rise in inflation, which hurts stock valuations. And they’re a direct threat to critical programs like Social Security and Medicare because they drive up government borrowing costs, leaving less money to go around.
Most of all, deficits rob our national coffers of the critical funds necessary to either stimulate or save the economy when the next fiscal slide begins.
“If current laws remain generally unchanged, CBO projects, federal budget deficits and debt would increase over the next 30 years — reaching the highest level of debt relative to GDP in the nation’s history by far.” — Congressional Budget Office, June 2018
