No country should handle fiscal affairs like a big drama. Greece in 2015 and the UK last year offer cautionary tales about what goes wrong when politics and public finances collide. Yet the United States feels no need to learn lessons from other countries. Instead, it is heading towards its own politics clash over the $31.4 trillion debt ceilingmaybe as early as next month. Everyone is asked to choose their heroes and villains in the upcoming fight and the stakes are high.
But for those of a more technocratic bent, who can set aside the impending debt ceiling policy, the underlying health of US public finances is equally alarming.
The US federal budget is losing money. The nonpartisan congressional budget office calculates it In the first seven months of fiscal 2023, underlying state revenues fell 10% with spending rising 12%. That leaves the federal budget deficit more than three times larger than in the same months in fiscal 2022.
Weak revenues reflect lower-than-expected CBO realized capital gains at the end of 2022, the transformation of the Federal Reserve’s quantitative easing program from a cash cow to a significant burden, and the possibility that the underlying recovery may not be as healthy as evidenced initial stats. Spending has increased substantially in nearly every major area of the federal budget.
If the first seven months patterns continue, it will extend an unfortunate trend in the US budget. The CBO not only expects deficit growth in the years to come, but also tends to overestimate the original health of public finances.
Any search for relief from less volatile long-term US fiscal data will also fail. The CBOs latest predictions show that the level of federal debt held by the public as a share of national income will be 98% in 2023, just 7.6% below its wartime peak in 1946 and on track to exceed it in 2028. For by comparison, UK public debt, even at a multi-decade high relative to gross domestic product, is still less than half the level it was at the end of the Second World War.
The rapid increase in US public debt reflects the dire state of US politics. Republicans only discover fiscal prudence when in opposition before cutting taxes when in office. Knowing this, Democrats have given up on fiscal prudence and are instead promoting huge, and often unlimited, spending programs like the Inflation Reduction Act.
As a result, the United States is eroding its position in any long-term international comparison on the soundness of public finances. To compare with the eurozone countries that requested support in the 2010s, Portugal, Ireland and Spain already have lower gross debt levels than the US, IMF forecasts show that US debt is projected to exceed that of Italy by 2028 and Greece by the end of the decade.
Of course, in a world of low interest rates, countries can live happily with slightly higher debt levels and not have to pay off their loans. by Olivier Blanchard work at the IMF and the Peterson Institute taught us this. But comfortably higher debt doesn’t mean borrowing nearly unlimited. Blanchard himself concerns that “the debt trajectory in the United States is not sustainable with current policy”.
Polarized politics could ensure that the US cannot pay all its bills in the coming weeks. This repetitive stage play is starting to consume the financial markets. But that’s likely to clear up after a few potentially hairy moments.
The real tragedy of US public finances is their chronic weaknesses. This will not generate a sudden crisis and does not show any signs of resolution. Ultimately, it is much more harmful. They will get worse as the US population ages, undermining the dollar as the world’s reserve currency and weakening America’s ability to project economic power on a global scale.
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