Why Americans are concerned once again

The federal budget deficit, an on-again, off-again concern for the U.S. electorate and economy, is back on and may stay that way for a while. Chronic challenges such as America’s aging population — as more people retire, the government has to shell out more in Social Security pension payments and Medicare health benefits — have been compounded in recent years by tax cuts and spending binges, swelling the gap between revenue raised and funding appropriated. By raising interest rates to their highest levels in more than 20 years to fight inflation, the Federal Reserve has made the cost of financing those deficits go up as well.

How large is the federal deficit?

Through the first 11 months of the fiscal year ending on Sept. 30, the deficit was $1.5 trillion, up sharply from $946 billion in the comparable period a year earlier. That sort of surge would usually happen only when the government is in recession-fighting mode, not when the economy is growing at a decent clip. Even judged in the context of the US economy, the deficit is imposing. It’s expected to clock in at about 6% of gross domestic product this year — a level never reached in the six decades between the aftermath of World War II and the 2008 crash. And each annual deficit adds to an already mammoth amount of publicly held debt — $26.3 trillion as of Sept. 29, nearly the size of the economy.

Why is the deficit in the news again?

The decision by Fitch Ratings Inc. on Aug. 1 to strip the U.S. of its top-tier AAA credit rating cast a spotlight on the parlous state of the government’s finances. Higher interest rates are making it more expensive to service America’s debt though payments to its lenders: The nonpartisan Congressional Budget Office calculates that the government’s interest bill alone will top $1 trillion in 2028, more than double the amount it paid out last year. And Republicans are making the case that the major domestic legislation that President Joe Biden touts as achievements

worthy of a second term are examples of deficit-widening fiscal profligacy.

How long has this issue been brewing?

The last time the federal government collected more than it spent was in fiscal 2001, which ended with a $128 billion surplus. A year later a mild recession and the upheavals of the Sept. 11 terror attacks pushed the U.S. back into the red. The far bigger economic contraction triggered by the global financial meltdown of 2008

meant that President Barack Obama presided over a fouryear run of trillion-dollar deficits. The gap swelled again as President Donald Trump pushed through a $1.5 trillion tax cut. It exploded during the pandemic, as Trump and later Biden sent government money to households and businesses to keep the economy afloat. At its peak, the deficit hit $3.1 trillion in 2020.

What’s the outlook?

The CBO expects the annual shortfall to keep growing in the

years ahead, reaching $2.9 trillion in 2033, equal to 7.3% of GDP. And some experts think that’s an underestimate, in part because the CBO assumes that lawmakers will allow the Trump tax cuts to expire and that defense spending won’t rise as tensions with China and Russia grow. Former Treasury Secretary Lawrence Summers argues the shortfall could come in at 11% of GDP that year. Since the end of World War II, that’s a share that’s only been topped by the pandemic years of 2020 and 2021.

What’s so bad about budget deficits?

There’s nothing intrinsically wrong with them, and deficit spending is sometimes an economic strategy. It made a lot of sense, for instance, to borrow a bucketful of dollars at the height of the pandemic to help keep households and businesses solvent and fast-track the development of vaccines to fight COVID-19. Big shortfalls make less sense when economic times are good or interest rates are elevated. The more money Washington pays out in interest, the less it has for other purposes. At present, Washington is on course to shell out more money to pay the interest on the debt than it spends to fund the military — and many of those interest payments will be going to foreign holders of U.S. debt, including China.

Do Americans care?

In annual polling by the Pew Research Center, the share of Americans naming the deficit as a top priority peaked at 72% in 2013, declined to 42% by 2021 but is trending upward again, reaching 57% in 2023.

Is this just a U.S. issue?

Definitely not. Globally, government debt has climbed $30 trillion in the past decade, to $87.3 trillion in the second quarter of 2023, according to the Institute of International Finance, which represents the world’s largest banks. Advanced economies like the U.S. and Japan account for the bulk of that, around $60 trillion. As a share of their economies, a few of those have racked up bigger central government debts than the U.S., including Japan, Italy, Greece and Singapore, according to figures from the International Monetary Fund.

ERIC LEE/BLOOMBERG The nonpartisan Congressional Budget Office expects the annual budget deficit to keep growing in the years ahead, reaching $2.9 trillion in 2033, equal to 7.3% of GDP. Fitch Ratings Inc. stripped the U.S. of its top-tier AAA credit rating Aug. 1.