Republicans are trying
to pass a new tax plan that includes, in Donald Trump’s words a, “Massive tax
cut”, despite their own avowed fiscal conservatism and warnings the legislation
could balloon the federal deficit by at least $1trillion. That sounds more like
the democrats’ opening of our wallets—just a bit in reverse.
The U.S. national debt passed $20 trillion earlier this year and will only deepen in coming years in this new plan.
The largest budget items driving the rising debt are retirement and healthcare programs. More than half of the 2016 budget was spent in these areas. As the U.S. population ages, those categoiries are only expected to grow. The debt itself fuels the fastest growing spending item: interest. The Congressional Budget Office expects annual net interest payments, which totaled approximately $240 billion in 2016, to hit $770B in 2027—an increase of more then 300%.
The US ran an average budget deficit of 2.8% of GDP between 1967 and 2016. But that increased in recent years, spurred by the Great Recession a decade ago, when tax revenue dried up and the government increased its spending to try to spur a rebound.
Total debt, including obligations to programs such as Social Security, more than doubled between 2000-10, when it exceeded $12 trillion. It represented 128% of GDP last year, according to the OECD.
That was lower than Portugal (146%) and Greece (185%) similar to the UK (123%), but more than double Denmark (53%) and Sweden (60%).
Economists argue that high levels of public spending crowd out private investment, eventually hurting growth. A high debt load could also constrain the options of the US the next time it needs to borrow. In recent years, concern about the debt has subsided, since borrowing costs have been unusually low.
"We've been kind of spoiled by low interest rates," said Eric Freedman, chief investment officer at US Bank Wealth Management. But he warns that if government interest rates rise it "would potentially impact future social programs".
Analysts say the US has the capacity to sustain high borrowing levels. But there are concerns about the medium-term debt, says Charles Seville, a senior director at Fitch Ratings, which gives the US its top credit grade of AAA.
"Unlike most other very highly rated countries the debt is increasing," he said.
