Here's the pattern of US federal government spending and revenues in the last 50 years. Average outlays during that time were 20.7% of GDP. Average revenues were 17.4% of GDP. Contrary to the widespread belief that US government spending and taxes have over time surged ever higher, to me the more obvious pattern here over the half-century is one of stability. Sure, government spending is higher and taxes are lower than the historical averages during the Great Recession. But during boom times like the late 1990s, taxes are above their historical average while spending is below. When President Trump took office early in 2017, US government spending and taxes were--whether for better or worse--almost bang on their long-run averages.
This CBO figures shows that if one looks back at years when the unemployment rate was below 6%, the average budget deficit has been 1.5% of GDP. But although the current unemployment rate has been substantially below 6% for several years, the projected budget deficits for the next decade are projected at 4.4% of GDP.
verall federal investment has been dropping over time: less for support of R&D, less for infrastructure, less for support of training and employment. It used to be a half-century ago, that the federal government spent more on investment than on the broad category of paying benefits, but the nature of the federal government has shifted substantially, and over time it has become primarily about paying benefits. As the figure shows, we are rapidly headed toward a situation in which half of all (non-interest) federal spending involves payments of benefits just to the elderly--not even counting benefits paid to those under age 65.
The figure above, showing overall patterns of spending and revenue, show the outcome. Spending keeps rising, driven in the medium-run by the rise in spending on the elderly. Despite the sustained economic growth and low unemployment rate, federal taxes dipped in the last year and will stay relatively low for a situation where the economy is doing fairly well, in substantial part because of the Tax Cuts and Jobs Act passed in December 2017. As this combination of spending and taxes leads to higher budget deficits, more government debt accumulates, and interest payments start climbing, too. For example, the CBO projections show that "net interest" is 1.6% of GDP in 2018, but rises to 2.6% of GDP by 2023.
Don't skip over that rise in interest payments too quickly. The US GDP is about $20 trillion in 2018. So 1% of GDP amounts to $200 billion which is being spent as a price paid for past borrowing--and thus won't be available for spending increases or tax cuts.
Combine these factors, and the US ratio of debt/GDP is headed out of its historical range. There have been spikes in the debt/GDP ratio before, notably in times of war, or during the large budget deficits during the Reagan presidency in the 1980s. But according to the CBO, using current law as its baseline, we are headed well outside those limits in the next couple of decades.
This pattern of a rising debt/GDP ratio raises a number of economic concerns. As the CBO report summarizes:
Such high and rising debt would have significant negative consequences, both for the economy and for the federal budget, including these:
- As interest rates continue to rise toward more typical levels, federal spending on interest payments would increase substantially;
- Because federal borrowing reduces national saving over time, the nation’s capital stock ultimately would be smaller, and productivity and total wages would be lower than would be the case if the debt was smaller;
- Lawmakers would have less flexibility than otherwise to use tax and spending policies to respond to unexpected challenges; and
- The likelihood of a fiscal crisis in the United States would increase. Specifically, the risk would rise of investors’ being unwilling to finance the government’s borrowing unless they were compensated with very high interest rates. If that occurred, interest rates on federal debt would rise suddenly and sharply relative to rates of return on other assets.
As I have said before, I am not someone who argues for sharp immediate reductions in budget deficits. But the long-term trajectory is troubling. And the undebated and de facto shift of the federal government to an institution where the main budgetary action is sending out payments, rather than making investments in the country's future, troubles me as well.