U.S. Budget Deficit
U.S. politicians once loudly and frequently bemoaned the size of the federal government’s budget deficit. The complaints faded as the country’s creditors showed no signs that they were worried about the government’s ability to pay its bills and the shortfall melted like ice cream on a summer’s day. The deficit shrank as a share of the economy for six straight years, narrowing to 2.5 percent of gross domestic product in the fiscal year that ended in September 2015. But in fiscal 2016, the gap widened again, to 3.2 percent of GDP. Now President Donald Trump has plans for big projects and tax cuts that could add $16 trillion to the debt over 20 years. Get ready to hear more about Washington spending beyond its means.
Trump has proposed building a wall between the U.S. and Mexico, spending as much as $1 trillion on infrastructure, increasing the nation’s military forces and slashing the corporate tax rate to 15 percent. During the past six years, his fellow Republicans in Congress have worked to enforce strict spending caps designed to hold down the federal debt; it’s unclear whether they’ll back down in the name of party unity. The most recent numbers don’t make it easier for them. In October, the U.S. Treasury Department reported that the budget deficit for the 2016 fiscal year was $587.4 billion, up from $439.1 billion the year before. This was due in part to tax breaks Congress revived in December 2015. The 2011 Budget Control Act had mandated $2 trillion in automatic spending reductions from 2012 to 2021, but in subsequent years Congress voted to roll back these cuts, known in Washington as the sequester. The provision will now trim spending by about $1.5 trillion. While the government’s annual interest bill amounted to 1.3 percent of GDP in 2016 — less than half what taxpayers paid when Ronald Reagan left the White House in 1989 — it’s expected to surpass 2 percent by 2021.
Deficit decriers — including Reagan — often noted that no business would survive by running its finances in the same way as the government. Yet the historical reality is that the government doesn’t often balance its books. The U.S. has run surpluses in only 12 of the last 75 years. Deficits surged through World War II before peacetime brought three years of surpluses from 1947 to 1949. The prosperity during the years when Bill Clinton was in the White House led to a $128 billion surplus in fiscal 2001. A year later this turned into a $157 billion deficit following a brief recession and the upheavals of the Sept. 11 terror attacks. The far bigger recession triggered by the global financial meltdown of 2008 meant that President Barack Obama entered office in the midst of a four-year run of trillion-dollar deficits that ended in 2012. Though the process wasn’t pretty, Obama and his Republican-controlled Congress brought the deficit down from a high of $1.4 trillion in fiscal 2009.
The long-term deficit outlook is troubling. Around 2024, when the last of the 76 million baby boomers approach retirement age, there will be heavy demands on Social Security, the Congressional Budget Office says. Some economists say the pain could arrive much sooner. If Trump carries through with all his spending plans and tax cut plans, there’s a chance the inflation rate will rise sharply and swell the government’s annual interest payments. That threat is cited by politicians pushing for a smaller government and their ideological allies at think tanks like the Peter G. Peterson Foundation and Fix the Debt. If anti-deficit forces in Congress aren’t powerful enough to rein in Trump’s tax and spending ideas, another group could take aim: bond vigilantes. Investors unhappy at the thought of accelerating inflation could sharply cut their purchases of Treasury debt. That’s what happened in 1993, when bond buyers effectively pressured President Bill Clinton to abandon his campaign promise of a tax cut for the middle class.
The Reference Shelf
- Ronald Reagan’s first inaugural address in 1981, decrying deficits.
- The January 2017 Congressional Budget Office outlook of the fiscal situation.
- William Gale, an economist at the Brookings Institution, and Brad DeLong, an economics professor at the University of California, Berkeley, debated whether deficits matter.
- Bloomberg QuickTake on the U.S. budget battles and a QuickTake Q&A on bond vigilantes.
David J. Lynch contributed to the original version of this article.
First published Dec. 17, 2013
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