Debt 2023: $33T

Alan Rappeport at NYT:

America’s gross national debt exceeded $33 trillion for the first time on Monday, providing a stark reminder of the country’s shaky fiscal trajectory at a moment when Washington faces the prospect of a government shutdown this month amid another fight over federal spending.

The Treasury Department noted the milestone in its daily report detailing the nation’s balance sheet. It came as Congress appeared to be faltering in its efforts to fund the government ahead of a Sept. 30 deadline. Unless Congress can pass a dozen appropriations bills or agree to a short-term extension of federal funding at existing levels, the United States will face its first government shutdown since 2019.

Over the weekend, House Republicans considered a short-term proposal that would slash spending for most federal agencies and resurrect tough Trump-era border initiatives to extend funding through the end of October. But the plan had little hope of breaking the impasse on Capitol Hill, with Republicans still divided on their demands and Democrats unlikely to support whatever compromise they reach among themselves.

The debate over the debt has grown louder this year, punctuated by an extended standoff over raising the nation’s borrowing cap.

That fight ended with a bipartisan agreement to suspend the debt limit for two years and cut federal spending by $1.5 trillion over a decade by essentially freezing some funding that had been projected to increase next year and then limiting spending to 1 percent growth in 2025. But the debt is on track to top $50 trillion by the end of the decade, even after newly passed spending cuts are taken into account, as interest on the debt mounts and the cost of the nation’s social safety net programs keeps growing.

College, Debt, and Wealth

Paul Tough at NYT:

In the fall of 2009, 70 percent of that year’s crop of high school graduates did in fact go straight to college. That was the highest percentage ever, and the collegegoing rate stayed near that elevated level for the next few years. The motivation of these students was largely financial. The 2008 recession devastated many of the industries that for decades provided good jobs for less-educated workers, and a college degree had become a particularly valuable commodity in the American labor market. The typical American with a bachelor’s degree (and no further credential) was earning about two-thirds more than the typical high school grad, a financial advantage about twice as large as the one a college degree produced a generation earlier. College seemed like a reliable runway to a life of comfort and affluence.

A decade later, Americans’ feelings about higher education have turned sharply negative. The percentage of young adults who said that a college degree is very important fell to 41 percent from 74 percent. Only about a third of Americans now say they have a lot of confidence in higher education. Among young Americans in Generation Z, 45 percent say that a high school diploma is all you need today to “ensure financial security.” And in contrast to the college-focused parents of a decade ago, now almost half of American parents say they’d prefer that their children not enroll in a four-year college.

He writes that the opinion has some basis in fact.  Younger college graduates do not have much of a wealth advantage over young non-college adults.

 Millennials with college degrees are earning a good bit more than those without, but they aren’t accumulating any more wealth. How can that be?

Lowell Ricketts told me he had a pretty good idea of the cause, even though the group’s data couldn’t be conclusive on this point. The likely culprit, he said, was cost: the rising expense of college and the student debt that often goes along with it. Carrying debt obviously diminishes your net worth through simple subtraction, but it can also prevent you from taking important wealth-generating steps as a young adult, like buying a house or starting a small business. And even if you (or your parents) were able to pay your tuition without loans, the savings you used are gone when you graduate, and thus are no longer available to serve as a down payment on a starter home or the beginning of a nest egg for retirement.

A few decades ago, tuition costs were manageable for many Americans. But since 1992, the sticker price has almost doubled for four-year private colleges and more than doubled for four-year public colleges, even after adjusting for inflation. Today the average total cost of attending a private college, including living expenses, is about $58,000 a year. After financial aid, the average net price for private-college students is about $33,000 a year; at public institutions, it is about $19,000. Those averages conceal a great deal of variation, however; at the University of Michigan (a public university), tuition, fees and expenses for out-of-state juniors and seniors total more than $80,000 a year.

Deficit and Debt 2023

Many posts have discussed federal deficits and the federal debt.

 From CBO:

Each year, the Congressional Budget Office publishes a report presenting its projections of what the federal budget and the economy would look like over the next 30 years if current laws generally remained unchanged. The long-term budget projections typically follow CBO’s 10-year baseline budget projections and then extend most of the concepts underlying them for an additional 20 years. This year, the long-term projections are based on CBO’s May 2023 baseline projections but also reflect the estimated budgetary effects of the Fiscal Responsibility Act of 2023 (Public Law 118-5), which was enacted on June 3, 2023.


In CBO’s projections, the deficit equals 5.8 percent of gross domestic product (GDP) in 2023, declines to 5.0 percent by 2027, and then grows in every year, reaching 10.0 percent of GDP in 2053. Over the past century, that level has been exceeded only during World War II and the coronavirus pandemic. The increase in the total deficit results from faster growth in spending than in revenues. The primary deficit, which excludes interest costs, equals 3.3 percent of GDP in both 2023 and 2053, but the total deficit is boosted by rising interest costs.


By the end of 2023, federal debt held by the public equals 98 percent of GDP. Debt then rises in relation to GDP: It surpasses its historical high in 2029, when it reaches 107 percent of GDP, and climbs to 181 percent of GDP by 2053. Such high and rising debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices. 

Federal debt as percentage of GDP 

Debt Limit Warning

 From CBO:

The debt limit—commonly called the debt ceiling—is the maximum amount of debt that the Department of the Treasury can issue to the public or to other federal agencies. The amount is set by law and has been increased or suspended over the years to allow for the additional borrowing needed to finance the government’s operations. On December 16, 2021, lawmakers raised the debt limit by $2.5 trillion to a total of $31.4 trillion.1 On January 19, 2023, that limit was reached, and the Treasury announced a “debt issuance suspension period” and began using well-established “extraordinary measures” to borrow additional funds without breaching the debt ceiling.

The Congressional Budget Office projects that if the debt limit remains unchanged, there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations. The extent to which the Treasury will be able to fund the government’s ongoing operations will remain uncertain throughout May, even if the Treasury ultimately runs out of funds in early June. That uncertainty exists because the timing and amount of revenue collections and outlays over the intervening weeks could differ from CBO’s projections.

If the debt limit is not raised or suspended before the Treasury’s cash and extraordinary measures are exhausted, the government will have to delay making payments for some activities, default on its debt obligations, or both.2 If the Treasury’s cash and extraordinary measures are sufficient to finance the government until June 15, expected quarterly tax receipts and additional extraordinary measures will probably allow the government to continue financing operations through at least the end of July.

Consquences of Default

Written Testimony of Mark Zandi Chief Economist of Moody’s Analytics, U.S. Senate Committee on Banking, Housing, and Urban Affairs’ Subcommittee on Economic Policy ““The Federal Debt Limit and its Economic and Financial Consequences” March 7, 2023

If lawmakers are unable to resolve the debt limit in time and the Treasury begins paying its bills late and defaults, financial markets would be roiled. A TARP moment seems likely, hearkening back to that dark day in autumn 2008 when Congress initially failed to pass the Troubled Asset Relief Program bailout of the banking system, and the stock market and other financial markets cratered. A similar crisis, characterized by spiking interest rates and plunging equity prices, would be ignited. Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would shut down as well.

It is unimaginable that lawmakers would allow things to get to this point, but as the TARP experience highlights, they have done the unimaginable before. Yet, if that experience is a guide, lawmakers would reverse course within a few days and resolve the debt limit impasse to allow the Treasury to resume issuing debt again and pay its bills. Much damage will have already been done, and although markets would right themselves, it would be too late for the already fragile economy, and a recession would ensue.

However, if lawmakers do not reverse course quickly and the impasse drags on for even a few weeks the hit to the economy would be cataclysmic. Most immediately, the federal government would have to slash its spending. Say if the debt limit was breached on October 1 and dragged on all month, the Treasury would have no choice but to cut government spending by an estimated $125 billion. And if there is no agreement in November, another close to $200 billion in spending would need to be cut. The hit to the economy as these government spending cuts cascade through the economy would be overwhelming.

Adding to the economic turmoil would be the loss of consumer, business, and investor confidence. Political brinkmanship over the operations of the federal government has been frightening for Americans to watch. In both the 2011 and 2013 debt limit episodes, households were closely attuned to the political hardball being played in Washington and consumer sentiment slumped. The brinkmanship is also unnerving for businesses, who will pullback on investment and hiring, and financial institutions, who will quickly turn more circumspect about extending credit to households and businesses.

The timing couldn’t be worse for the economy as even before the specter of a debt limit breach many CEOs and economists believe a recession is likely this year. With the Federal Reserve ramping up interest rates in an effort to quell wage and price pressures, avoiding a recession would be difficult even if nothing else went wrong. Most leading indicators of recession, including the prescient policy yield curve – the difference between 10-year Treasury yields and the federal fund rate – point to recession beginning later this year at about the time lawmakers will be doing battle over the limit.

Based on simulations of the Moody’s Analytics model of the U.S. and global economies, the economic downturn that would ensue would be comparable to that suffered during the global financial crisis. That means real GDP would decline beginning late this year and through much of 2024, falling over 4% peak to trough, costing the economy more than 7 million jobs, and pushing the unemployment rate to over 8%. Stock prices would fall by almost a fifth at the worst of the selloff, wiping out $10 trillion 4 in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates would spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates would not fall back to where they were previously. And the economy’s long-term growth prospects will be materially diminished. A decade from now, real GDP is almost one percentage point lower than if there had been a clean debt limit increase, there are 900,000 fewer jobs, and the full-employment unemployment rate is 0.1% percentage points higher.

Student Debt Relief and Biden v. Nebraska

Katherine Knott at Inside Higher Ed:

Several Supreme Court justices appeared skeptical of the Biden administration’s plan to forgive up to $20,000 in federal student loans during a nearly four-hour hearing Tuesday.

As expected, the hearing focused on whether federal statute allows the Biden administration to forgive student loans, whether the plaintiffs have standing to challenge the plan and whether the justices should apply a stricter standard in their review of the two lawsuits before the court.

The court’s six conservative justices homed in on questions of fairness and what Congress intended when it authorized the education secretary in 2003 to “waive” or “modify” provisions of student loan programs to ensure that those affected by a national emergency aren’t worse off financially.

The conservative justices seemed to think the Biden plan was too large to say it was a modification. “We’re talking about half a trillion dollars and 43 million Americans,” Chief Justice John Roberts Jr. said. “How does that fit under the normal understanding of modifying?”

Six states—Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina—and two Texas residents filed separate lawsuits in the fall to block the debt-relief plan before it began. The states allege that the plan would harm state revenues and agencies that hold student loans, while the Texas individuals take issue with the fact that they didn’t have a chance to comment on the proposal.

Both sets of plaintiffs argue that the Higher Education Relief Opportunities for Students Act of 2003, which the Biden administration says justifies its debt-relief plan, does not authorize that plan.

Public Opinion on Debt and Default

Many posts have discussed federal deficits and the federal debt.

Anthony Salvato and colleagues at CBS:

Views on raising the debt ceiling start off negative in principle, but if people are faced with the prospect of a U.S. default, a big majority would end up saying, "raise it."

Here's how that unfolds:

We first asked if the U.S. borrowing limit should be raised to pay current debts, and most say no, with Republicans and conservatives especially opposed. That suggests in part that the general idea of added borrowing is not popular.

But then we asked those opposed to raising the debt ceiling: what if that means the U.S. defaults?

In that case, the majority view on the debt ceiling moves in favor of raising it.

Republicans, Democrats and independents all shift substantially toward raising it when presented with the prospect of default. And shifts are most pronounced among those more worried about an economic downturn if the limit isn't raised.

So, it turns out defaulting is even more unpopular than borrowing.

And it's an important lesson both for politics — as we watch political leaders talk about the matter in the coming weeks — and for how we gauge public opinion on a complicated issue and its potential implications.

 

Draconian Cuts

Many posts have discussed federal deficits and the federal debt.

From the centrist Committee for a Responsible Federal Budget:

The exact amount of savings needed for full budget balance is uncertain and will depend both on budget projections in the Congressional Budget Office's forthcoming ten-year baseline as well as the path of any proposed policies. In the recent CRFB Fiscal Blueprint for Reducing Debt and Inflation, we estimated achieving balance would require roughly $14.6 trillion of deficit reduction through 2032, including over $2 trillion of policy savings (and nearly $400 billion of interest savings) in 2032 alone.1

To achieve these savings without more revenue, we estimate all spending in 2032 would need to be cut by 26 percent; this figure rises to 33 percent if defense and veterans spending is exempted from the cuts. For a sense of magnitude, applying this cut across the board would mean reducing annual Social Security benefits for a typical new retiree by $10,000 to $13,000 in 2032. It would also mean laying off 1.1 to 1.4 million federal employees (more than two-thirds of the civilian workforce if the military were exempted) and removing 20 to 25 million people from Medicaid eligibility.

Excluding Social Security and Medicare from cuts would make the task of balance even more unrealistic. Without touching spending on defense, veterans, or Social Security, all other spending would need to be cut by 51 percent. Also excluding Medicare would mean that remaining spending would need to ultimately be cut by 85 percent.

Debt: Pay Now or Pay More Later

CBO analyzes the effects of waiting to stabilize the federal debt.

• Regardless of when the process was begun, stabilizing federal debt as a percentage of GDP would require that income tax receipts or benefit payments change substantially from their currently projected path.
• The longer policymakers waited to implement a policy change, the more debt would grow in relation to GDP, and the greater the policy changes needed to stabilize it would be.
• If the option of increasing income tax rates was chosen, the effects of delaying implementation would be greater than they would be under the option of cutting benefits: Increases in interest costs would be larger, GDP and household consumption would be lower, and debt as a percentage of GDP would be higher in the long run.
• Under either option, the negative effects of delaying the implementation of policy changes on people’s consumption and labor supply would be disproportionately borne by younger people and lower-income people.

 

Why Debt Matters

 Desmond Lachman at Inside Sources:

The major problem with a high public debt level is that it saddles the government with large future interest payment obligations. That leaves little room for other public expenditures and makes it difficult for the government to bring the budget deficit under control. Failing to rein in the deficit, in turn, risks keeping the public debt on an ever-increasing path. In that context, it has to be of deep concern that the non-partisan Congressional Budget Office is forecasting that on present trends the country’s public debt to GDP ratio will approximately double from around 100 percent at present to 200 percent by 2050.

A high public debt level highly compromises the Federal Reserve’s ability to keep inflation under control. In particular, it makes it difficult for the Fed to raise interest rates for fear of adding to the government’s interest payment burden. Such a consideration would seem to have particular pertinence today with inflation running at its fastest pace in the past forty years and with the Fed needing to raise interest rates substantially from its present zero bound if it hopes to get the inflation genie back into the bottle.

Especially at a time of high inflation, a high public debt level makes the country economically vulnerable. That is because we have become the world’s largest debtor nation. For many years now, we have relied on the kindness of strangers in general and on the Chinese and Japanese in particular to finance our budget excesses.

If foreigners begin to perceive that we are in the process of inflating away our debt, they will be reluctant to hold that debt and will demand higher interest rates in order to compensate them for inflation risk. That in turn could cause the dollar to swoon, which would only add to inflationary pressures and fuel further concerns about our wanting to inflate away our debt.

$30 Trillion Debt

Alan Rappeport at NYT:

America’s gross national debt topped $30 trillion for the first time on Tuesday, an ominous fiscal milestone that underscores the fragile nature of the country’s long-term economic health as it grapples with soaring prices and the prospect of higher interest rates.

The breach of that threshold, which was revealed in new Treasury Department figures, arrived years earlier than previously projected as a result of trillions in federal spending that the United States has deployed to combat the pandemic. That $5 trillion, which funded expanded jobless benefits, financial support for small businesses and stimulus payments, was financed with borrowed money.

Opinion on the Debt and Debt Limit

Karlyn Bowman at AEI:

An Axios/Ipsos Hard Truth Higher Education poll from August, for example, asked people to name issues that worried them the most, and government budget and debt tied with immigration for sixth place behind coronavirus, political extremism, climate, crime, and health care. In Gallup’s mid-August question that asks people to volunteer what they think is the most important problem facing the country, 2 percent spontaneously mentioned the federal deficit and debt. In the abstract, Americans have long wanted the country to live within its means, but at the same time, they want government to do a lot. Most recent polls show solid support for the $1 trillion infrastructure legislation and slightly less enthusiastic support for the $3.5 trillion social infrastructure package.

The news cycle moves at a dizzying speed, and it is likely that if the US comes close to defaulting on the federal debt sometime in October, the public will start paying attention. This happened in past showdowns as people realized that government checks would stop, not to mention dire global financial implications. In early August 2011, 71 percent in a Pew Research Center poll said they had been following the negotiations on the debt limit deal very or fairly closely. A mid-October 2013 question from the Kaiser Family Foundation found that 75 percent followed the fight between President Obama and congressional leaders about the extension and the shutdown very or fairly closely. (In 2011, resolution came in early August and in 2013, it came in mid-October.)

BIG CAVEAT:  Many people do not understand this issue.  It is likely that they equate raising the debt ceiling with increasing spending.  That is false. 

GAO reports: 

• The debt ceiling does not control the amount of debt. Instead, it is an after-the-fact measure that restricts the Treasury’s ability to borrow to finance the decisions already enacted by Congress and the President.
• Delays in raising the debt ceiling can disrupt financial markets, increase U.S. borrowing costs, and threaten the full faith and credit of the United States.

Budget Update

From the Congressional Budget Office:

In CBO’s budget projections (called the baseline), the federal budget deficit for fiscal year 2021 is $3.0 trillion, nearly $130 billion less than the deficit recorded in 2020 but triple the shortfall recorded in 2019. Relative to the size of the economy, this year’s deficit is projected to total 13.4 percent of gross domestic product (GDP), making it the second largest since 1945, exceeded only by the 14.9 percent shortfall recorded last year. The economic disruption caused by the 2020–2021 coronavirus pandemic and the legislation enacted in response continue to weigh on the deficit (which was already large by historical standards before the pandemic).

Baseline deficits under current law are significantly smaller after 2021 and average $1.2 trillion from 2022 to 2031. They average 4.2 percent of GDP through 2031, well above their 50-year average of 3.3 percent. In CBO’s projections, the deficit declines to about 3 percent of GDP in 2023 and 2024 before increasing again, reaching 5.5 percent in 2031 (see Table 1). By the end of the period, both primary deficits (which exclude net outlays for interest) and interest outlays are increasing in nominal terms and as a share of GDP.

With such deficits, federal debt held by the public—which stood at $21.0 trillion, or 100 percent of GDP, at the end of 2020—would total $23.0 trillion, or 103 percent of GDP, at the end of 2021. As recently as 2007, at the start of the previous recession, federal debt equaled 35 percent of GDP. Projected federal debt dips just below 100 percent of GDP between 2023 and 2025 before rising again, reaching 106 percent in 2031, about the same as the amount recorded in 1946, which stands as the highest in the nation’s history.

Revenues in CBO’s baseline increase to 17 percent of GDP in 2021 and are relatively stable thereafter, averaging 18 percent from 2022 through 2031. Outlays are projected to decline from 31 percent of GDP this year to about 21 percent from 2023 through 2025 as pandemic-related spending wanes and low interest rates persist. Outlays then increase relative to GDP, owing to rising interest costs and greater spending for major entitlement programs.

Compared with its estimates from February 2021, CBO’s estimate of the deficit for 2021 is now $745 billion (or 33 percent) larger, and its projection of the cumulative deficit between 2022 and 2031, $12.1 trillion, is now $173 billion (or 1 percent) smaller. In 2021, recently enacted legislation—primarily the American Rescue Plan Act of 2021 (Public Law 117-2)—increases the projected deficit by $1.1 trillion, mostly as a result of higher spending. The largest budgetary effects stem from additional funding for recovery rebates for individuals, for state and local governments, for educational institutions, and for an extension of expanded unemployment compensation. The effects of a stronger economy as well as technical changes (that is, changes that are neither legislative nor economic) partially offset the deficit effects of recently enacted legislation. For subsequent years, CBO has increased its projections of both revenues and outlays—the former by more than the latter.

Projected revenues over the next decade are now higher because of the stronger economy and consequent higher taxable incomes. In addition, tax collections in 2020 and 2021—particularly amounts collected from individual income taxes—were stronger than the amounts implied by currently available data on economic activity and the past relationship with revenues. In CBO’s projections, that unexpected strength dissipates over the next few years. Besides resulting from the direct effects of recent legislation, the changes to outlays since February over the projection period are largely attributable to higher interest rates (which boost net interest costs) and higher projected inflation and wages (which increase the costs of major benefit programs).

CBO’s projections are constructed in accordance with the Balanced Budget and Emergency Deficit Control Act of 1985 (P.L. 99-177) and the Congressional Budget Act of 1974 (P.L. 93-344). Those laws require CBO to construct its baseline projections under the assumption that current laws governing revenues and spending will generally stay the same and that discretionary appropriations in future years will match current funding, with adjustments for inflation.2

CBO’s baseline is not intended to provide a forecast of future budgetary and economic outcomes; rather, it provides a benchmark that policymakers can use to assess the potential effects of future policy decisions. Future legislative action could lead to markedly different outcomes. Even if federal laws remained unaltered for the next decade, actual budgetary outcomes would probably differ from CBO’s baseline—not only because of unanticipated economic developments, but also as a result of many other factors that affect federal revenues and outlays.

Deficit and Debt, Then and Now

Many posts have discussed the deficit and the debt.  Policymakers and the general public have tended to ignore these problems in recent years, 

 In 1994, President Clinton named Bob Kerrey and John Danforth to lead a bipartisan commission on entitlements and tax reform.  It made little headway.  They write at WSJ:

But there was near unanimity within the commission on the scale of the problem. Entitlements were on an unsustainable trajectory. They consumed an ever-growing share of federal spending. In 1994 the budget deficit was $203 billion (2.8% of gross domestic product), and the national debt was $3.4 trillion (47.8% of GDP).

The crisis we identified 27 years ago seems negligible given where the debt stands today. The nonpartisan Congressional Budget Office estimated in January 2020 that annual budget deficits will exceed $1 trillion, and that the debt—then hovering at $17.2 trillion—would more than double as a share of the economy over the next 30 years. These numbers don’t take into account $65 trillion of unfunded liabilities for Social Security and Medicare. The CBO now projects that, under current law, the deficit will reach $1.9 trillion in 10 years and the debt will skyrocket from 102% to 202% of GDP within 30 years.

The words “current law” are critical as the CBO forecasts only what will happen should government make no changes in spending and tax policies. But President Biden has already proposed $5 trillion in additional spending over the next 10 years, much of it for new or expanded entitlements, labeled “infrastructure” and “investment.”

Beyond the numbers, the biggest difference between then and now is that in 1994 both parties worried about deficits and debt. Today, neither Democrats nor Republicans seem to care. Under President Trump, the national debt grew from 76% of GDP to 100%. Under Mr. Biden’s first budget proposal, the debt is expected to reach 117% of GDP by 2031.

While politicians in both parties toss fiscal restraint to the winds, the good news is that a hefty proportion of voters are still concerned about the debt. An Ipsos poll conducted April 23-26 found that 75% of respondents believe too much debt can hurt the economy.

Current figures suggest that the federal government is digging America into a hole. According to CBO’s baseline projections—which don’t account for Mr. Biden’s proposals—interest costs will surpass spending for Social Security by 2045 and will consume nearly half of federal revenue in 2051.

Despite the urgency of the problem, nearly every elected official in Washington is an original co-sponsor of the “do nothing” plan. While today’s hyperpartisan political environment makes it unlikely that our fiscal crisis will be resolved anytime soon, elected officials would do well to take at least some action to address the issue.

Deficits and Debt Will Increase

From the Committee for a Responsible Federal Budget: 

Now that the American Rescue Plan Act has been signed into law, the federal deficit is on course to exceed $3 trillion this year, with debt reaching a new record as a share of the economy.

In February, under what was current law at the time, the Congressional Budget Office (CBO) projected the budget deficit would total $2.3 trillion in 2021, $1.1 trillion in 2022, and $1.9 trillion in 2031. Incorporating the direct effects of the American Rescue Plan Act, we project the deficit will now total $3.4 trillion this year – higher than last year’s record $3.1 trillion – and $1.6 trillion in 2022.

With the passage of the American Rescue Plan Act, we now project deficits will total $16.6 trillion over the 2021 to 2031 budget window, a $2.1 trillion increase over CBO’s prior estimate of $14.5 trillion. Virtually all of this increase will take place between 2021 and 2026.

Measured as a share of the economy, the deficit will total 15.6 percent of GDP this year and average 4.7 percent over the coming decade. Previously, the deficit was expected to total 10.3 percent of GDP in 2021 and average 4.4 percent over the 2022-2031 period. As a share of GDP, the 2021 deficit will be the fourth highest in history, eclipsed only by three years of borrowing to fight World War II.

Inflation Ahead?

Many posts have discussed the deficit and the debt.  Policymakers and the general public have tended to ignore these problems in recent years, in part because of low inflation and interest rates.  But this settting could change.

 James Pethokoukis at The Week:

One plausible scenario for a big change in America's economic climate — as well as those in other rich economies — is laid out in the 2020 book The Great Demographic Reversal: Aging Societies, Waning Inequality, and an Inflation Revival. Economists Charles Goodhart and Manoj Pradhan make the case that the current macroeconomic situation of persistently low interest rates and low inflation was created by a particular set of historical economic circumstances. Demographics and globalization are key here. The late 20th century saw a flood of workers into labor markets across the world thanks to the baby boomers, as well as the addition of workers from China and Eastern Europe once the Soviet Union dissolved. This labor-supply shock, according to Goodhart and Pradhan, had the tendency to push down inflation — particularly as seen in wage growth — and interest rates. And thus create a world where it's been easy for government and business to borrow.

But now those demographic and globalization shocks are reversing. Working-age populations are peaking or even shrinking around the world. And rising worker wages in China means sending jobs there isn't the bargain for Western companies that it used to be. As a result, Goodhart and Pradhan conclude, bargaining power will shift back to domestic workers and away from employers, pushing up wage inflation. And at the same time the number of old people, who consume rather than produce, will continue to increase. That means more demand for goods and services — and, again, more inflation. "The great demographic reversal and the retreat from globalization will bring back stronger inflationary pressures — this is our highest conviction view," Goodhart and Pradhan wrote in a 2020 essay.

So a world of higher inflation, higher interest rates, and greater fiscal challenges for Washington — a world few policymakers seem to be considering or even imagining as possible. Yet the pandemic and the tsunami of money being spent to fight it should encourage Washington to think harder about just such a possibility.

Deficit and Debt: 2021 and Beyond

 From the Congressional Budget Office:

Deficits

CBO projects a federal budget deficit of $2.3 trillion in 2021, nearly $900 billion less than the shortfall recorded in 2020. At 10.3 percent of gross domestic product (GDP), the deficit in 2021 would be the second largest since 1945, exceeded only by the 14.9 percent shortfall recorded last year. Those deficits, which were already projected to be large by historical standards before the onset of the 2020–2021 coronavirus pandemic, have widened significantly as a result of the economic disruption caused by the pandemic and the enactment of legislation in response.

In CBO’s projections, annual deficits average $1.2 trillion a year from 2022 to 2031 and exceed their 50-year average of 3.3 percent of GDP in each of those years. They decline to 4.0 percent of GDP or less from 2023 to 2027 before increasing again, reaching 5.7 percent of GDP in 2031. By the end of the period, both primary deficits (which exclude net outlays for interest) and interest outlays are rising.

Debt

Federal debt held by the public—which stood at 100 percent of GDP at the end of fiscal year 2020—is projected to reach 102 percent of GDP at the end of 2021, dip slightly for a few years, and then rise further. By 2031, debt would equal 107 percent of GDP, the highest in the nation’s history.

The Debt Blows Up

By the end of 2020, CBO reports, federal debt held by the public is projected to equal 98 percent of GDP. The projected budget deficits would boost federal debt to 104 percent of GDP in 2021, to 107 percent of GDP (the highest amount in the nation’s history) in 2023, and to 195 percent of GDP by 2050.

If federal debt as a percentage of GDP continued to rise at the pace that CBO projects it would under current law, in the long term the economy would be affected in two significant ways: 

• That debt path would raise borrowing costs, reduce business investment, and slow the growth of economic output over time,7 and
• Rising interest costs associated with that debt would increase interest payments to foreign holders of U.S. debt and thus reduce U.S. national income.

Persistently rising debt as a percentage of GDP would also pose significant risks to the fiscal and economic outlook, although financial markets currently do not reflect those concerns. In particular, that debt path would have these economic and financial effects:

• It would increase the 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—and 
• It would increase the likelihood of less abrupt, but still significant, negative effects, such as expectations of higher rates of inflation and more difficulty financing public and private activity in international markets.

In addition, high and rising debt makes government financing more vulnerable to increases in interest rates because costs to service that debt rise more for a given increase in interest rates when debt is higher than when it is lower. High and rising debt also might cause policymakers to feel restrained from implementing deficit-financed fiscal policy to respond to unforeseen events or for other purposes, such as to promote economic activity or strengthen national defense. 

Deficit and Debt

From the Congressional Budget Office:

Deficits. CBO projects a federal budget deficit of $3.3 trillion in 2020, more than triple the shortfall recorded in 2019. That increase is mostly the result of the economic disruption caused by the 2020 coronavirus pandemic and the enactment of legislation in response. At 16.0 percent of gross domestic product (GDP), the deficit in 2020 would be the largest since 1945.

The deficit in 2021 is projected to be 8.6 percent of GDP. Between 1946 and 2019, the deficit as a share of GDP has been larger than that only twice. In CBO’s projections, annual deficits relative to the size of the economy generally continue to decline through 2027 before increasing again in the last few years of the projection period, reaching 5.3 percent of GDP in 2030. They exceed their 50-year average of 3.0 percent in each year through 2030.

Debt. As a result of those deficits, federal debt held by the public is projected to rise sharply, to 98 percent of GDP in 2020, compared with 79 percent at the end of 2019 and 35 percent in 2007, before the start of the previous recession. It would exceed 100 percent in 2021 and increase to 107 percent in 2023, the highest in the nation’s history. The previous peak occurred in 1946 following the large deficits incurred during World War II. By 2030, debt would equal 109 percent of GDP.

Federal Debt as a Percentage of Gross Domestic Product

  If you want to know why this level of debt is a big problem, read here.

Deficit and Debt are Up. Concern is Down.

Coronavirus is accelerating the already-serious problem of federal debt.

Drew DeSilver at Pew:

Among the collateral damage from the coronavirus pandemic has been the U.S. economy and the federal budget. The pandemic has caused massive economic disruption, and the government’s response has pushed the federal budget further out of balance than it’s been in nearly eight decades. But Americans appear to be slightly less concerned about the deficit than they have been in recent years.

In a Pew Research Center survey conducted June 16-22, just under half of U.S. adults (47%) called the deficit “a very big problem” in the country today – down from 55% in the fall of 2018. Over roughly that same period, the deficit grew from $779.1 billion at the end of fiscal 2018 to $2.8 trillion as of the end of July, according to data reported Wednesday by the Treasury Department. (The federal fiscal year ends on Sept. 30.)