“Today, we grieve yet another dubious milestone in the fiscal decline of the most powerful and prosperous nation in history,” stated the US House Budget Committee Chairman Jodey Arrington last week when referring to the alarming accumulation of gross national debt that hit a new record of $35 trillion.
This rate of increase, equivalent to $6.4 billion of new debt per day, is pushing the US fiscal sustainability to its limit. By the early 2030s, government bill will exceed revenue, warned the US Congressional Budget Office.
The escalating debt trajectory raises concerns about the feasibility of financing and the associated costs. “Risks to economic growth and lower investment in the private sector could lead to lower wages due to losses in productivity. And upward pressure on interest rates would make it more expensive for individuals to borrow money—for example to purchase a car or home,” according to the US Government Accountability Office (GAO).
“Congress and the administration must act to move the nation off the untenable long-term fiscal course on which it is currently operating,” said Gene L. Dodaro, Comptroller General of the US and head of GAO. “The federal debt level is growing at a rate that could threaten the vitality of our nation’s economy and the safety and well-being of the American people,” quoted the US Debt Clock.
Forgotten Fiscal Discipline
Historically, the US fiscal deficit used to be around 2%-3% until the 1980s. But soon, it ventured into an “uncharted territory”. Over the past decade, the US has been running a deficit averaging around $10 trillion per year.
“In the past, there was this understanding that if you run a deficit, you run for some special reason in a temporary situation, such as world war, after which you will revert to fiscal discipline. But since the 2008 financial crisis, that fiscal discipline, upon which the global financial market and the global financial system rest, has been broken,” Ali Farid Khwaja, Chairman of KTrade Securities said.
The situation will only worsen with an aging American population, which necessitates increased spending on pensions, healthcare, and other benefits, further straining the fiscal budget, which failed to be fully replenished by taxes.
“Current projections do not indicate a future of much stronger growth that could reduce debt as a proportion of GDP… Fiscal adjustment is unavoidable, as the country cannot simply outgrow its debt dilemma,” according to the Amundi Research Center.
“Political pressures to maintain popularity have led to increased spending. Cutting budgets can lead to political unpopularity and electoral losses, which creates a cycle of persistent high spending,” according to Ali Khwaja.
Unsurprisingly, resolving this massive risk is on neither party’s agenda. “In an election year, it is not expected that either party will be willing to discuss long-term policy adjustments necessary to limit the increase in debt,” as per the Amundi research report.
“When a government realizes that they can spend more money for political benefits, then it’s very difficult for them to control that genie when it comes out of the bottle. But popular political options are not always good economic options,” remarked Ali Khwaja.
Global Impact
The unreined spending spree is creating massive risks for the global financial system. As the US government borrows more, the resulting increase in interest rates ripples through global financial markets.
“Right now, the US is still able to borrow and attract capital from the rest of the world, but countries are feeling the pinch of rising interest rates. In 5 years or so, most of the emerging and low-income countries that rely on external borrowing will need to use most of their budget for the payment of interest cost,” Ali Khwaja said.
The massive risks for the global financial system have two implications, less trust by international market players, and an intensified impulse to seek an alternative currency.
“Very soon other countries, especially the large holders of the US debt, will start asking the question of where the US debt is heading and taking some policy options. It can lead on a very dangerous path, as the US will also try to defend its position by non-economic means,” he said.
“For the US, a fairly simple solution is to allow global free trade and global movement of people, which attracts more younger people to come into the economy and grow the younger businesses, and thus increase tax collection. Unfortunately, its political choices are creating an equilibrium in which it will remain in fiscal deficit,” he added.
About Author
Hadia Safeer Choudhry is a dynamic and multifaceted individual holding an academic background in International Relations with a strong passion for research, writing, and community engagement.
