Washington's Unsustainable Fiscal Future

The United States Department of the Treasury recently released the 2023 year end version of the Financial Report of the United States which provides decision makers and citizens with a snapshot of the nation's fiscal health.  Needless to say and not overly surprisingly, the situation looks rather dire.  In this posting, I'll provide you with some summary graphics and commentary from the report and let you decide for yourself what the fiscal future of the United States looks like.

 

The first table outlines Washington's overall fiscal reality noting that the dollar amounts are in billions (i.e. $1000 billion equals $1 trillion):

 

The budget deficit for fiscal year (FY) 2023 increased by 23.2 percent or $319.7 billion to $1.695 trillion from the previous fiscal year.  Taxes and other revenues decreased by 9.3 percent or $460.3 billion to 4.466 trillion from the previous fiscal year. thanks to a decline in individual income tax and tax withholdings, a decline in corporate income taxes and decreased deposits of earnings for the Federal Reserve due to increased interest rates as you can see on this chart:

 

Total liabilities excluding Medicare and Social Security shortfalls grew by 9.9 percent or $3.876 trillion on a year-over-year basis, reaching $42.898 trillion.  Here is a chart showing the breakdown of Washington's liabilities:

Again, it is important to remember that this total liability of nearly $43 trillion does not include the shortfall in funding of both Medicare and Social Security which looks like this in the case of Social Security:

 

It also does not include intergovernmental debt which, when added to the total liabilities of $42.898 trillion would add an additional $7.09 trillion to the total debt as shown here (with a comparison to 2014):

 

 

Here is a chart showing the U.S. budget deficit and net operating costs (revenues vs. costs) for the past five fiscal years:

 

Here is a very sobering chart showing the projected federal spending and receipts out to 2098 observing that the analysis includes no recessionary periods in the future:

 

The growth in spending on net interest in the debt is frightening to say the least with net interest costs rising to roughly the same level as all other government spending over the next 75 years.

Lastly, here is a chart showing the historical and projected debt-to-GDP levels between 1980 and 2098:

 

 

At the end of fiscal 2023, the debt-to-GDP level was approximately 97 percent and, under current fiscal policies and the projections based on assumptions in the report, will reach 531 percent in 2098.  Here is a table showing the 75-year fiscal gap (i.e. how much primary deficits must be reduced or how much primary surpluses must grow over the next 75 years to make fiscal policy sustainable) and how delays will make the spending decreases and tax increases even more painful and time passes:

 

Let's close with two quotes taken directly from the report:

 

"The projections in this Financial Report show that current policy is not sustainable."

 

"The longer policy action to close the fiscal gap is delayed, the larger the post-reform primary surpluses must be to achieve the target debt-to-GDP ration at the end of the 75-year period.  Future generations are harmed by a policy because the higher the primary surpluses are during their lifetimes, the greater is the difference between the taxes they pay and the programmatic spending from which they benefit."

  

In other words, all that decision makers in Washington are doing today is kicking the federal debt crisis further and further down the road without making the difficult decisions necessary for responsible spending.  No one in bought and sold Congress is willing to do the heavy lifting and force the federal government to live within its means.  As the authors of the report note, Washington's current fiscal reality is nothing more and nothing less than unsustainable.

Why the Debt Ceiling Doesn't Matter

Once again, Washington is grappling with its debt problem.  In actuality, while they make a great deal about the debt ceiling, in the hallowed halls of Congress, the ruling class knows that the fiscal situation in the United States is unsustainable.  Let's look at three measures which prove their fiscal incompetence.

 

1.) Interest owing on the current federal debt:

 

In the first quarter of 2023, the annualized interest owing on the federal debt hit another new record of $928.929 billion, up 80 percent from $516.098 in the third quarter of 2020 just after the mini-recession of the pandemic wound down.  Obviously, given the increase in interest rates on the federal debt since the Federal Reserve has done its best to kill the inflation that it launched during its money-printing response to the pandemic as shown here:

 

...this fiscal situation is unsustainable and it is just a matter of time before the annual interest payments on the debt passes the $1 trillion mark, money which does not add to economic growth.

  

As an aside, given that the United States is by far the biggest spender on defense when compared to other nations, it is interesting to see that spending on defense, the biggest single line item on Washington's annual budget, is now roughly the same as spending on debt interest payments:

 

 

2.) Federal spending:

 

The red line shows the general trend of the growth of federal spending over the period from 1970 to 2020.  The massive growth in federal spending as Washington responded to the COVID-19 pandemic during 2020 is very obvious.  Again, this fiscal situation is unsustainable.

  

3.) Growth in the debt ceiling:

 

 

Thanks to Statista, we can see that it doesn't matter which party is in power, the debt ceiling rapidly rises as Washington habitually spends more than it brings in as revenue.  Once again, this fiscal situation is unsustainable as we can see on this graph which shows the federal surplus/deficit situation going back to 1980: 

 

 

The United States federal debt ceiling has become a laughable concept.  Washington's ruling class loves to spend more than it brings in as revenue, a reality that will eventually become painful as Congress kicks the "debt can" further and further down the road.

The debt ceiling doesn't matter for one reason; it just becomes the new debt floor.

Stephen Harper and the Elusive Fiscal Balance Mantra

The Harper campaign's mantra is that, in these uncertain times, Canadian voters need to stay the course and vote for the Conservative Party, the only political party that has the ability to steer the Canadian economy through uncertain waters as shown on this video:

Let's take a look at what has happened to Canada's federal financial picture since Stephen Harper first stepped into the Prime Minister's Office on February 6, 2006.  Please keep in mind that the late Finance Minister Jim Flaherty presented his first budget on May 2, 2006, covering the 2006 - 2007 fiscal year.

Here is what the federal budgetary balance looks like since fiscal 2006 - 2007:

Since fiscal 2006 - 2007, the Harper government has spent $122.22 billion more than it brought in as revenues, including a $13.752 billion surplus in fiscal 2006 - 2007 that was largely a relict of the Martin government.  Please note that this total deficit includes a projected $1.9 billion surplus in fiscal 2015 - 2016 which is far from a sure thing given the collapse in oil prices and the slowing of the Canadian economy into near-recession.

Here is what happened to the net federal debt since fiscal 2006 - 2007:

The net federal debt has increased by 23.88 percent over 10 fiscal years.

Like other nations around the world, Canada's central bank has performed a great service to the federal government since the Great Recession as shown on this chart:

The yield on 10 year Canadian government bonds has fallen from around 4 percent in 2006 to its current level of just under two percent.  In fact, if we go back further in time, the yields on Canadian government bonds ranged between 6 and 9 percent during the years between 1992 and 1998 and yet, by fiscal 1997 - 1998, the Chretien government was able to run a small surplus as shown on this graph:

Over the years between fiscal 1997 - 1998 and 2005 - 2006 when interest rates ranged between 4 and 6 percent or between two and three times the current level, the Canadian government of the day was able to reduce the federal debt from $559.9 billion to $481.5 billion.

If interest rates had remained at the elevated levels seen prior to the Great Recession, there is no way that the Harper government would have been able to achieve any semblance of fiscal balance in 2015 - 2016.  It will also be increasingly unlikely that any political party will be able to achieve fiscal balance on a going forward basis if/when interest rates on the outstanding debt rise by even a modest amount, particularly if the economy continues to underperform.

Let's close this posting with a quote from a speech given by newly minted Reform MP Stephen Harper to the National Citizens' Coalition way back in June 1995 about Alberta Premier Ralph Klein's attempts to balance budgets and reduce deficits:

""Although I can't speak of the details because it is not my area of expertise, what Mr. Klein is doing in Alberta is, in principle, what governments need to do.  He is taking a look at a situation that is unsustainable financially and he is taking the steps necessary through expenditure reductions to eliminate that financial uncertainty on a permanent basis within the life of a single Parliament.  That is the only way it ever gets done.  Any politician who says he is going to do it over two Parliaments is never going to do it.  That's the golden rule.  That's something that you can learn from Ralph Klein." (my bold)

Apparently, our current Prime Minster has either forgotten his golden rule or is just ignoring it in the face of the economic reality that he has created for Canadians.  Three strikes and you're out Mr. Harper?