Deficits As Far As The Eye Can See
The Congressional Budget Office reported that the federal budget deficit was just over $1 trillion in the first five months of the fiscal year 2021. This was $423 billion more than the deficit recorded during the same period last year. (CBO)
As terrifying as the current numbers are they can’t hold a candle to the 30 years projections. The CBO said on Thursday, “Debt would continue to increase thereafter, exceeding 200 percent of GDP by 2051. That amount of debt would be the highest by far in the nation’s history, and it would be on track to increase further.”
Deficits are supposed to drop from an all-time high in 2021 as pandemic spending falls off, but it won’t take long for deficits to start increasing once again.
- The CBO projects, “deficits decline to 4.0 percent of GDP or less from 2023 to 2027 before increasing again, reaching 5.7 percent of GDP in 2031.” It’s important to note that these levels are almost twice the average over the past half-century.
It’s all uphill (or downhill if you’re a fan of austerity) after 2027. CBO projects deficits will, “grow from 6.2 percent of GDP in 2032 to 13.3 percent by 2051″ The main cause of this growth is rising rates.
- CBO projects that, “rising federal debt and higher interest rates would combine to more than triple net spending for interest over that last two decades of the projection period.”
Why debt matters. Obviously, if you are a MMTer than debt doesn’t matter and you will think all of this talk about debt is a waste of time. However, for those of sane mind and body, the CBO explains in its report why larger deficits will become a problem…
– CROWDING OUT: The CBO explains that if we stay on this current debt path it will increase, “borrowing costs, reduce business investment, and slow the growth of economic output over time”
– LOSS OF FAITH: With higher and higher debt loads, foreign investors may begin to lose faith in the U.S.’s ability’s to make interest payments which would be catastrophic since it would cause an, “erosion of confidence in the U.S. dollar as an international reserve currency, and more difficulty in financing public and private activity in international markets.”
IMPORTANT NOTE: All of this data was released before the passage of the 1.9 trillion dollar stimulus bill and obviously doesn’t include any of the possible infrastructure and other spending bills the Biden administration has floated. You can now see why earlier today Andrew Sullivan tweeted, “The era of small government is over.”