The United States Fiscal Position - A Crisis in the Making

If you want a sense of where Washington's next fiscal crisis will come from, look at this graphic with data from the Federal Reserve's FRED database:

 

In the third quarter of 2023, interest on the federal debt was consuming 45 percent of every tax dollar that individuals remitted to Washington.  While this is below the record set back in the 1980s and early 1990s, it is important to keep in mind that this is what interest rates looked like back then compared to today:

 

Here is a graphic from the Bureau of Economic Analysis showing how federal interest payments have grown since Q1 2021:

 

The non-partisan Congressional Budget Office shows the following increase in net interest outlays (in grey) to 2053 as a percentage of GDP:

 

Net interest outlays will rise from 2.5 percent of GDP in 2023 to 3.6 percent in 2033, 4.8 percent in 2043 and 6.7 percent in 2053, outstripping the growth in mandatory spending on both social security and major health care programs.

With Washington's total debt looking like this:

 

...and, to reiterate, it's pretty apparent that an unprecedented debt crisis is looming as interest owing on the federal debt rising at a record rate and nearly doubling since the third quarter of 2020:

 

Nations, particularly those who are members of the BRICS organization are increasingly divesting of the U.S. dollar which means that Washington will be forced to keep interest rates relatively high to attract investors to its increasingly unappealing currency, further increasing both the debt and interest payments on the debt.

 

Net interest outlays will rise from 2.5 percent of GDP in 2023 to 3.6 percent in 2033, 4.8 percent in 2043 and 6.7 percent in 2053, outstripping the growth in mandatory spending on both social security and major health care programs:

 

Here is a quote from the aforementioned Congressional Budget Office's latest report on American's fiscal situation with my bolds:

 

"Persistently large deficits would lead to substantial increases in federal debt. In CBO’s projections, federal debt held by the public, measured in relation to GDP, surpasses its highest level in history in 2029, reaching 107 percent. Debt continues to climb thereafter and reaches 181 percent of GDP at the end of 2053.

 

Such high and rising debt would have significant economic and financial consequences. It would, among other things, slow economic growth, drive up interest payments to foreign holders of U.S. debt, elevate the risk of a fiscal crisis, increase the likelihood of other adverse effects that could occur more gradually, and make the nation’s fiscal position more vulnerable to an increase in interest rates. In addition, it could cause lawmakers to feel more constrained in their policy choices."

 

According to the CBO, here are the consequences of high and rising federal debt:

"1.) Borrowing costs throughout the economy would rise, reducing private investment and slowing the growth of economic output.

2.) Rising interest costs associated with that debt would drive up interest payments to foreign holders of U.S. debt, decreasing the nation’s net international income.

3.) There would be an elevated risk of a fiscal crisis—that is, a situation in which investors lose confidence in the U.S. government’s ability to service and repay its debt, causing interest rates to increase abruptly, inflation to spiral upward, or other disruptions to occur.

4.) The likelihood of other adverse effects would also increase. For example, expectations of higher rates of inflation could become widespread, which could erode confidence in the U.S. dollar as the dominant international reserve currency.

5.) The United States’ fiscal position would be more vulnerable to an increase in interest rates, because 

the higher debt is, the more an increase in interest rates raises debt-service costs.

6.) Lawmakers might feel constrained in using fiscal policy to respond to unforeseen events or for other purposes, such as to promote economic activity or strengthen national defense."

 

If America's federal politicians continue to spend what they don't have and kick the "debt can" further and further down the road, America is screwed and the demise of the U.S. dollar is assured.  With Washington sabre-rattling at China, Russia, Iran and North Korea, one can be assured that cuts to spending are not going to happen and that outlays for defense are going to continue to rise in the future, putting further strain on the U.S. economy.

Irresponsible Fiscal Management in Washington - The Worsening Debt and Deficit

With Russiagate and the Kavanagh confirmation hearings consuming all of the mainstream media's "bandwidth", there is one very important aspect of Washington that is getting a pass from the media.  

With Donald Trump having promised to "drain the swamp" and with the Republicans supposedly being the party of fiscal prudence, the latest press release from the United States Treasury Department should cause American taxpayers to question whether anything has really changed in Washington.

During and just after the Great Recession took hold of the United States economy, there was great concern about Washington's growing debt and deficit problems.  As you can see on this graph from FRED, just after the beginning of the Great Recession in December 2007, the growth rate of the federal debt accelerated markedly:

Just in case you were curious, here is the current debt-to-the penny:

Here is a graph showing a history of the federal surplus/deficit:

As you can see, after growing to $1.413 trillion in fiscal 2009 and hitting $1.294 trillion in fiscal 2010 and $1.299 trillion in fiscal 2011, the federal deficit declined to a post-Great Recession low of $438.5 billion in fiscal 2014.  Since then, the deficit has started growing again, hitting $665.4 billion in fiscal 2017 indicating that Washington is, once again, showing its true fiscal abilities.

The most recent Monthly Treasury Statement from the Treasury Department for the month ending August 31, 2018 shows that little has changed under the new guard:

During one month alone, Washington had total outlays of $433 billion against total receipts of $219 billion leaving a shortfall of $214 billion or roughly one-third of the total deficit in fiscal 2017.

Let's look at the fiscal picture for the first 10 months of fiscal year 2018:

Outlays totalled $3.883 trillion against total receipts of $2.985 trillion leaving a shortfall of $898 billion, a deficit that is now 35 percent higher than the deficit in fiscal 2017.

Here is a table showing a summary of receipts, outlays and surpluses/deficits for fiscal years 2017 and 2018:

Both the spending of $433.3 billion and the deficit of $214.15 billion are the highest monthly totals in the last two fiscal years as shown on this graphic: 

In fact, when it comes to federal outlays, August's total sets a new record as shown on this graphic from FRED:

The only saving grace that Washington currently has is low interest rates on its debt as shown here and here:

Despite low interest rates, since the beginning of fiscal year 2018, Washington has paid out $332 billion on its current debt, an amount that consumed most of the federal government's income from corporate income taxes, duties and taxes other than individual taxes and Social Security and other payroll taxes which totalled $393 billion.

As we can see, little has changed when it comes to Washington's spending habits.  It seems that no matter which party holds the reins of power, irresponsible fiscal management is the order of the day with the federal government, an issue that is likely to become worse with the impending tax cuts. 

What Americans Want From Their Government and What They Are Getting

With the Trump Administration boosting spending on defense and cutting spending on other discretionary line items and the fact that Washington has once again hit the latest debt ceiling, a recent poll by Morning Consult and Politico provides us with an interesting snapshot of where American taxpayers want their hard-earned dollars spent.  The poll was conducted on March 16 to 19, 2017 with a national sample of 1927 registered voters and the results were weighted to correct for race/ethnicity, gender, educational level and region.

Let's open with this question to give us a sense of what issues are most important to American voters:

"Thinking about your vote, what would you say is the top set of issues on your mind when you cast your vote for federal offices such as the U.S. Senate or Congress".

Among all voters, the result was as follows:

Economic Issues - 29 percent

Security Issues - 20 percent

Health Care Issues - 18 percent

Senior's Issues - 14 percent

Education Issues - 7 percent

Women's Issues - 5 percent

Energy Issues - 3 percent

Obviously, the current economic situation in the United States is quite important to American voters, particularly given the long-term joblessness of millions of former workers followed by security and health care issues.  

With that in mind, let's skip to the section of the poll that covers government spending options and look at the areas that are of greatest concern to American voters.  Here is the question asked by Morning Consult:

"Please indicate if you think the government should be spending more, spending less or spending about the same amount as it currently does for each of the following:"

1.) National Defense/Military:

More - 51%

Less - 18%

About the same - 22 percent

Don't know/No opinion - 9%

A slight majority of those polled believed that the U.S. government should be spending more on the military and national defense.   Here is a screen capture showing how Donald Trump is doing just that:

It is interesting to see that, in Donald Trump's proposed discretionary budget for fiscal 2018, defense spending will consume 56.6 percent of the total budget. 

2.) Military Aid to Other Nations:

More - 16 percent

Less - 52 percent

About the same - 21 percent

Don't know/No opinion - 11 percent

The United States actually invests significantly in military operations in other nations; in fiscal 2015, a total of $5.647 billion was spent on foreign military financing, over half of which was spent on funding Israel's military machine ($3.1 billion).  That said, the $5.6 billion in foreign military aid is rather insignificant compared to the total Department of Defence proposed budget of $582.7 billion for fiscal 2017.

3.) Health Care:

More - 58 percent

Less - 15 percent

About the same - 16 percent

Don't know/No opinion - 11 percent

Let's start by looking at the Trump budget's proposed spending on Health and Human Services as shown here:

An overwhelming majority of Americans believe that more needs to be spent on health care; despite that, Donald Trump proposes to cut spending on Health and Human Services by $15.1 billion or 17.9 percent to $69 billion.  

Now, let's look at non-discretionary spending on health care in America.  According to the Centres for Medicare and Medicare Services (CMS), National Health Expenditures (NHE) grew to $3.2 trillion in 2015, up 5.8 percent from the previous year, accounting for a whopping 17.8 percent of GDP.  Medicare spending totalled $646.2 billion and Medicaid spending grew to $545.1 billion.  NHE is expected to grow at an average rate of 5.6 percent per year over the decade from 2016 to 2025, rising to 19.9 percent of GDP by 2025.  Here is a graphic showing proposed spending on Medicare and Medicaid for the period between 2015 and 2017:

  

According to the CMS, Medicare outlays will grow from $695 billion in fiscal 2016 to $1.3 trillion in fiscal 2026 and the average monthly enrolment will expand from 57 million beneficiaries in fiscal 2016 to 75 million in fiscal 2026.  Congress and the Oval Office will have little choice in the matter with an aging population; either spending will have to rise or services will have to be cut. 

4.) Education:

More - 60 percent

Less - 13 percent

About the same - 17 percent

Don't know/No opinion - 9 percent

Again, an overwhelming majority of Americans believe that the government needs to spend more on education.  That said, Donald Trump's budget proposes that $9 billion or 13 percent be cut from the Department of Education, bringing the budget down to $59 billion as shown here:

Obviously, there is a significant difference in priorities between Donald Trump and American voters when it comes to education unless, of course, you want your child to attend a charter school. 

Both Donald Trump and American voters have made their priorities quite clear; while they both generally agree on the big ticket item, defense, there is significant disagreement on education and at least one aspect of health care.  As well, with rising spending on mandatory Medicare and Medicaid required over the coming decade at the same time as the debt passes the $20 trillion mark like it doesn't even matter, American voters will soon find that they cannot have their cake and eat it too.  Something will have to give.

Washington's Debt - Entering Uncharted Waters

One issue that is getting lost in the personal mudslinging of the 2016 election cycle is the issue that will have the most impact on future generations of Americans, the debt.  A recent publication by the Congressional Budget Office looks at how critical that problem will become over the next three decades despite the fact that the Obama Administration has greatly reduced the deficits over the past two presidential terms after the winding down of the extreme levels of spending in the post-Great Recession years.

The CBO opens by noting one simple fact; over the next three decades, the federal government deficit will rise because government spending will grow faster than revenues.  The projected growth in spending is directly related to the aging of the baby boom generation and the lengthening of life expectancy to the point where by 2046, spending on Social Security, Medicare and Medicaid will account for half of all federal non-interest spending.


Let's start by looking at the next decade.  The federal debt at the end of 2007 stood at 35 percent of GDP, a rather healthy level all things considered and very close to the 50 year average of 39 percent of GDP.  Thanks to massive stimulus and rescue spending between 2007 and 2009, the federal debt had risen to 74 percent of GDP.  Only in one period has the federal debt exceeded the 70 percent level; from 1944 to 1950 on the back of spending during the Second World War.  

Here is a graphic showing the federal debt held by the public as a percentage of GDP going back to 1790 and projected out to 2046:

Between 2017 and 2026, the deficit is expected to rise from its current level of 2.9 percent of GDP to an average of 3.9 percent of GDP and, at the end of the period, the debt held by the public will rise to 86 percent of GDP.  Extra spending on Social Security will contribute 1.0 percentage points of the 3.9 percent of GDP deficit spending and extra spending on Medicare will contribute 1.9 percentage points of the 3.9 percent of GDP deficit spending.

Let's look further down the road.  Let's start with this table showing the projections out to 2046 in the CBO's analysis:

While absolutely no economist can accurately project what will happen three months in the future let alone three decades, the CBO's analysis, not unexpectedly, shows that Washington's fiscal situation gets uglier and uglier as the years pass, a trend that is quite reasonable given the federal government's penchant for spending well beyond its means.  As well, it is important to keep in mind that the CBO analysis does not include any major economic contractions; should there be a repetition of the Great Recession or a facsimile thereof, the future fiscal situation would look far worse than this analysis projects. 

Here is a graphic showing what happens to the federal debt, spending and revenues as a percentage of GDP out to 2046:

By 2046, the federal debt held by the public will have hit a record 145 percent of GDP, nearly double what it is today.

Let's break down the spending side of the equation.  Here is a graphic showing what will happen to spending on Social Security, major healthcare programs, net interest on the debt and other non-interest spending as a percentage of GDP out to 2046:

You can see that spending on net interest and major health care programs rise significantly when compared to the increase in GDP over the next three decades.

Here is a graphic showing what will happen to revenues from personal and corporate income taxes, payroll taxes and other revenues as a percentage of GDP out to 2046:

Interestingly, the CBO projects that the only increasing source of revenue as a percentage of GDP will be from individual income taxes, that is, individual's tax load will rise faster than the economy is growing.  Think about that for a moment!  Even with individual taxpayers shouldering the heavy burden of increased tax revenues, it still won't be enough to keep the debt from growing.

The CBO then looks at the size of changes in non-interest spending (i.e. cuts in spending) or revenues (i.e. increases in taxes) that would be required to reduce the debt to its 50 year average of 39 percent of GDP or hold it at its current level of 75 percent of GDP as shown on this graphic:

Looking at the policy changes needed to keep the debt-to-GDP level at its current 75 percent in 2046, Washington would need to increase revenues by 9 percent annually or cut expenditures by 8 percent annually.  The longer Washington waits, the more painful the tax increases/spending cuts will be as shown on this graphic:

Right now, Washington is living in a fiscal dream world largely because the Federal Reserve has kept interest rates at their current low level for an extended period of time, allowing the federal government to add to the debt without significantly raising the level of interest owing on the total debt.  For instance, here is a graphic showing what has happened to the interest rate on ten year Treasuries over the past five decades:

This is not likely to be the case over the next thirty years, suggesting that the CBO's analysis is erring on the side of caution.  Everything always reverts to the mean and the mean interest rate on ten year Treasuries since 1962 is 6.35 percent, more than four times the current rate of 1.5 percent. 

The four year election cycle lulls voters into believing that everything is absolutely wonderful when it comes to how the two main party candidates will handle their personal tax situation.   Both the Democrats and the Republicans are promising a tax system that will reduce taxes on low and middle income families not to mention on the wealthiest that dwell among us.  That said, as we can see from the CBO analysis, federal governments of the future will have some very, very difficult and unpopular decisions to make if they hope to avoid the painful consequences of uncontrolled and irresponsible public debt accumulation.