It seemed shocking at the time: An annual gap between federal spending and federal revenue of more than $1 trillion.
But that was 2009, the depth of the worst economic downturn since the 1930s, and emergency government spending seemed in order. Congress passed a huge stimulus program that year, one reason the annual deficit hit an unprecedented $1.4 trillion. Annual deficits drifted down after that, leveling off at $585 billion during President Barack Obama’s last year in office.
The budget deficit is headed back toward trillion-dollar territory, however. With no changes in U.S. fiscal policy, the nonpartisan Congressional Budget Office forecasts an annual deficit of $1.027 trillion in 2022, as federal revenue fails to keep pace with the ballooning costs of Social Security, Medicare and Medicaid. But if the Republican tax cuts and other policies go into effect soon, which seems likely, Uncle Sam could face another trillion-dollar deficit while President Donald Trump is still in his first term.
Does a trillion-dollar deficit matter?
The deficit will hit $1.05 trillion in 2019 and $1.1 trillion in 2020, according to the Committee for a Responsible Federal Budget, if Congress passes the tax cut legislation it’s currently negotiating, along with disaster relief and other measures meant to avert arbitrary limits on spending established several years ago. The tax cuts alone would add about $150 billion to the deficit each year, on average, with other likely changes pushing that up by another $25 billion per year, or so. Deficits will only get larger, unless there are major cutbacks in spending or new taxes in the future.
Does it matter if Washington runs trillion-dollar deficits indefinitely? Maybe not at first. Economists used to think investors would revolt if America’s federal debt eclipsed the total size of its economy. But the national debt is now 103% of GDP, and there are no obvious problems. Interest rates remain low and there’s no sign investors are losing confidence in America’s ability to pay what it owes.
But that doesn’t mean the United States can rack up debt endlessly, without consequences. The United States will spend about $250 billion on net interest payments this year — roughly 10 times the cost of operating the State Department and nearly 7% of all federal spending. Those numbers will only go up, as interest rates rise from near-record-low levels of around 2.4%, back toward historical norms of around 7%. More spending on interest payments means less spending on defense, road and bridge construction, air-traffic control and everything else the government funds. A higher debt load could also force further reductions in the U.S. credit rating, which would push rates even higher. And rising interest rates often trigger a recession.
Deficit’s impact on elections
Republicans — once the party of fiscal discipline — don’t seem to care much about federal deficits these days. Some claim tax cuts will generate so much new economic activity that federal revenue will go up by more than the tax cuts cost. That’s largely fantasy, however. Tax cuts could boost growth by a few tenths of a percentage point, but that’s nowhere near enough to replace all the lost tax revenue.
For the time being, trillion-dollar deficits may not be much of a political problem, either. Republicans howled when Obama presided over the nation’s first trillion-dollar deficit, but Obama handily won re-election in 2012, losing few votes to debt fears. Trump may enjoy the same indifference if he runs for re-election in 2020. The national debt may be unprecedented in size, but it won’t be a problem until it’s a problem, and nobody’s sure when that will be.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman