US National Debt Expected to Increase Regardless of Election Outcome | ORBITAL AFFAIRS

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The National Debt: A Growing Concern for the U.S. Economy

Key Takeaways

  • Despite rhetoric to the contrary, the national debt has increased significantly under both Donald Trump and Joe Biden.
  • Experts say that trend is likely to continue no matter which presumed nominee is elected in November.
  • While the national debt is currently manageable, economists are growing concerned it’s on an unsustainable trajectory.

No matter who wins November’s presidential contest between President Joe Biden and former President Donald Trump, forecasters see one likely outcome for the nation’s finances: an ever-growing national debt that’s increasingly burdensome because of high interest rates.

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Trump has repeatedly promised to pay off the $34.6 trillion national debt, most recently at a fundraiser in January, although hasn’t specified how. For his part, Biden’s White House proposed a budget this year that would reduce the budget deficit by $3 trillion over 10 years, though Congress didn’t pass it into law.

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Despite promises, however, the government spent far more than it took in under both of them, and economists don’t see any reason for that trend to reverse itself.

While the upcoming election could be a significant one for financial issues including student loan debt, credit card fees, and taxes, the trajectory of the budget is unlikely to change much no matter which party wins.

“The election could change the medium-term fiscal outlook, though potentially less than one might imagine,” Alec Phillips and Tim Krupa, analysts for Goldman Sachs, wrote in a commentary earlier this month. “While a Republican sweep would involve an extension of the expiring tax cuts, for the most part, this would simply extend current policy (and the current effect on the deficit). While a Democratic sweep would likely involve tax increases, much of this would likely go toward new spending.”

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Federal Budget Trajectory Worries Some Forecasters

The trajectory of the budget is getting worse and is setting off more alarm bells among forecasters. The Federal Reserve’s campaign of interest rate hikes meant to combat inflation has made the debt costlier to service. So much so that for the first time the U.S. will pay more on interest than it spends on defense in 2024 ($870 billion versus $822 billion, according to the Congressional Budget Office.)

By some standards, the national debt is actually fairly manageable despite its immense size because the U.S. economy is so productive and growing at a healthy clip. Among the countries of the G7—a group of nations with advanced economies and democratic governments—the U.S. is about the middle of the pack when it comes to the size of its debt compared to its gross domestic product.

However, it’s not the current debt level that’s alarming experts, but what will happen in the decades ahead. By 2054, the spending deficit will amount to 8.5% of the gross domestic product every year, a spending level only exceeded during and shortly after WWII, the Congressional Budget Office estimated in a March report.

“In our view, the problem is not so much the previous debt accumulation in the United States— which is large but manageable—but rather the outlook for sizable budget deficits as far as the eye can see,” Michael Pugliese and Aubrey George, economists at Wells Fargo Securities, wrote in a commentary this week.

Experts Say Deficit Levels Are Unsustainable

The trouble is that unless the government stops spending so much more each year than it takes in, the debt-to-GDP ratio is going to grow much larger, according to an analysis this week by economists at Deutsche Bank. Government deficits would have to run anywhere from 2.4%-4.1% of the GDP for the debt-to-GDP ratio to remain stable, they estimated. The CBO estimates deficits will be much larger than that, at around 5%-6% of GDP over the coming decades.

Federal Reserve Chair Jerome Powell and the International Monetary Fund have recently warned the U.S. is on an unsustainable trajectory with its budget. Fixing it would require balancing the books somehow, either by cutting spending or raising taxes, which are usually opposed by Democrats and Republicans, respectively.

When lawmakers of both parties have negotiated budget deals, they typically have compromised by avoiding both spending cuts and tax increases. Meanwhile, spending on the COVID-19 pandemic and increased spending on defense have combined with higher interest rates to fuel ever-growing deficits.

The problem is a solvable one, the Wells Fargo economists concluded, given that the U.S. enjoys many financial advantages, including the fact that the dollar is the world’s reserve currency and the U.S. has the world’s largest and most diverse economy.

“Fiscal consolidation via higher revenues, lower spending or some combination of the two would involve policy trade-offs but help set U.S. fiscal policy on a more sustainable path to help ensure these advantages are maintained,” they wrote.

Read the original article on Investopedia.

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