Federal borrowing puts US debt on path to exceed World War-II levels

A surge in government borrowing in the face of the pandemic recession has put the United States in a position it has not seen since World War II: In order to pay off its national debt this year, the country would need to spend an amount nearly as large as its entire annual economy.

And still, economists and many fiscal hawks are urging lawmakers to borrow even more to fuel the nation’s economic recovery.

The amount of US government debt has grown to nearly outpace the size of the nation’s economy in the 2020 fiscal year and is set to exceed it next year, as the virus downturn saps tax revenues, spurs government spending and necessitates record amounts of federal borrowing, the Congressional Budget Office said Wednesday. Federal debt, as a share of the economy, is now on track to smash America’s World War II-era record by 2023.

The budget office report underscored the scrambled politics of deficits in 2020: It showed debt held by the public climbing to 98% of the size of the economy for the fiscal year ending Sept. 30. Forecasters had previously expected the nation to reach those levels at the end of the decade, a time frame that had already alarmed fiscal hawks in Washington, who warned that ballooning deficits would consume federal budgets and chill private investment.

But the virus has upended those predictions, prompting even longtime champions of fiscal prudence to urge lawmakers on Wednesday to keep borrowing more for the time being, in order to help people and businesses survive the lingering pain of a sharp recession and now-slowing recovery.

“We should think and worry about the deficit an awful lot, and we should proceed to make it larger,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget in Washington, which has for years pushed lawmakers to take steps to reduce deficits and debt.

The turnabout on deficit fears caps several years of declining concern over Washington’s spending more than it takes in, particularly among Republicans. Lawmakers voted along party lines in 2017 to pass a $1.5 trillion tax cut that President Donald Trump and Republican leaders insisted would pay for itself but has instead added to the deficit. The budget deficit surpassed $1 trillion in 2019 — before the coronavirus pandemic hit — a jump of 17% from 2018 as tax cuts and spending increases continued to force heavy government borrowing.

The pandemic has plunged the economy into its sharpest quarterly contraction in growth in nearly 75 years, ballooning the deficit in the process. With millions out of work and businesses shuttered, tax revenues have fallen for the federal government, along with states and municipalities.

Congress and Trump moved quickly to approve more than $3 trillion in new federal spending to help businesses and individuals stay afloat through the abrupt slowdown in economic activity. All of those factors necessitated large sums of government borrowing, sending deficits — which had grown steadily even in the middle of a record economic expansion — skyward.

The deficit — the difference between what the United States spends and what it earns through taxes and other revenue — is expected to reach $3.3 trillion for fiscal year 2020, the budget office said on Wednesday. That is more than triple the level it reached in the 2019 fiscal year.

Economic theory has long held that rising debt as a share of the economy would drive up the amount of money governments must pay in interest to borrowers. Like a household with a lot of loans, the theory went, creditors would demand higher interest rates to hand cash to a heavily indebted borrower. With its debt payments more expensive, the household — or government — would have to borrow even more to stay current on its obligations.

That would result in a debt spiral in which the government was not able to do anything but fund its debt, the economists said, although such a spiral did not materialize over the past decade, as debt climbed and interest rates stayed low.

Because the pandemic hit the economy so quickly and painfully this year, lawmakers raced to borrow money much faster than they did during the last recession, when it took two years for the debt ratio to climb by a similar amount, in percentage-point terms: Debt as a percent of gross domestic product grew from 39% at the end of the 2008 fiscal year to nearly 61% at the end of 2010.

But it has been decades since the amount of federal debt was larger than the sum of the nation’s annual economic output. That came in 1946, shortly after the war ended.

The fiscal woes are not just confined to the United States’ need to borrow. In a separate report released Wednesday afternoon, the budget office updated its forecasts for the solvency of the Social Security Trust Fund, showing it will run out of money faster than the office previously forecast in June.

The new estimates imply the fund will be exhausted by 2031, a year earlier than previously projected, forcing immediate benefit cuts, unless lawmakers intervene. Medicare’s hospital insurance trust fund is now on track to run out of money in 2024, instead of 2026.

The aggressive federal response to the pandemic in March resulted in trillions of dollars in additional government spending, as Washington looked to provide tax breaks, assistance for small and large businesses, direct checks for low- and middle-income individuals and supplemental benefits for the unemployed.

Those measures were widely supported, as millions of workers were suddenly unemployed and businesses were forced to close their doors. Most economists have continued to call for additional spending, as the pandemic shows no sign of abating.

Loretta Mester, the president of the Federal Reserve Bank of Cleveland, who has warned about previous deficits, told reporters Wednesday that her own forecasts for the economic recovery hinge in part on continued fiscal support, and that without it, the United States might struggle to make it through shutdowns and onto a sustained growth path.

While Mester said that she was “not one of those people who think that deficits don’t matter,” the United States cannot worry about loading up on debt in the middle of a nascent recovery.

“This isn’t the right time to have that conversation,” she said.

International New York Times