WASHINGTON — The United States’ gross national debt topped $30 trillion for the first time on Tuesday, a worrying fiscal milestone that underscores the fragility of the country’s long-term economic health as it grapples with the surge. prices and the prospect of higher interest rates.
The breach of that threshold, which was revealed in new Treasury Department figures, came years earlier than expected due to the trillions in federal spending the United States has deployed to fight the pandemic. That $5 trillion, which funded expanded unemployment benefits, financial support for small businesses and stimulus payments, was funded with borrowed money.
The borrowing spree, which many economists saw as necessary to help the United States recover from the pandemic, has left the country with such a huge debt burden that the government would have to spend more than the whole of the annual US economy to pay for it. disabled.
Some economists argue that the country’s high debt load is not unhealthy given that the economy is growing, interest rates are low and investors are still willing to buy US Treasury securities, which gives them safe assets to help them manage their financial risk. These securities allow the government to borrow money relatively cheaply and use it to invest in the economy.
For years, presidents have promised to limit federal borrowing and reduce the nation’s budget deficit, which is the gap between what the nation spends and what it takes in. Under President Bill Clinton, the United States actually ran a budget surplus between 1998 and 2001.
But keeping deficits in check had gone out of fashion in recent years, including under the Trump administration, when lawmakers blew budget ceilings and borrowed money to fund tax cuts and other federal spending.
Now, deficit concerns have resurfaced, helping to stall negotiations on President Biden’s $2 trillion backstop and climate spending proposal. Sen. Joe Manchin III of West Virginia, a Democrat whose vote is critical to getting Mr. Biden’s package through, cited “stunning debt” as the reason he could not support the legislation.
The lingering pandemic has slowed the momentum of economic recovery, fueling inflation rates not seen since the early 1980s and raising the prospect of higher interest rates, which could increase the US tax burden.
“Reaching the $30 trillion mark is clearly an important step on our dangerous fiscal trajectory,” said Michael A. Peterson, chief executive of the Peter G. Peterson Foundation, which promotes deficit reduction. “For many years before Covid, America had an unsustainable structural fiscal trajectory because the programs we designed weren’t funded enough by the revenues we took in.”
Understanding Inflation in the United States
The gross national debt represents debt held by the public, such as individuals, businesses, and pension funds, as well as debts that one part of the federal government owes another part.
Renewed worries about debt and deficits in Washington follow years of disregard for the consequences of big spending. During the Trump administration, most Republicans stopped being tax hawks and voted along party lines in 2017 to pass a $1.5 trillion tax cut along with increased federal spending .
While Republican lawmakers helped increase the country’s debt burden, they have since blamed Mr. Biden for putting the country on a difficult fiscal path by funding his program. After a long stalemate in which Republicans refused to raise the U.S. borrowing limit, threatening a first-ever federal default, Congress finally agreed in December to raise the nation’s debt ceiling to around 31, 4 trillion dollars.
In January 2020, before the pandemic spread to the United States, the Congressional Budget Office projected that the gross national debt would reach $30 trillion by the end of 2025. The total debt held by the public exceeded the size of the US economy last year. , a decade faster than predicted by forecasters.
The nonpartisan office warned last year that rising interest costs and health care spending as the population ages would increase the risk of a “fiscal crisis” and higher inflation, a situation which could undermine confidence in the US dollar.
The Biden administration has said the $1.9 trillion pandemic relief package Democrats passed last year was a necessary measure to protect the economy from further damage. Treasury Secretary Janet L. Yellen argued that such large federal investments are affordable because interest costs as a share of gross domestic product are at historic lows thanks to still interest rates. low.
But that backdrop could start to change as the Federal Reserve prepares to raise interest rates, which have been set near zero since the start of the pandemic, to rein in inflation.
The Fed indicated last week that it was on track to begin raising rates at its next meeting in March. Investors expect the central bank to usher in five rate hikes this year, taking rates to a range of 1-1.25%.
The Fed also kept long-term interest rates low by buying government-backed debt and keeping those securities on its balance sheet. These purchases are expected to end next month, and last week the Fed signaled that it planned to “significantly” reduce its bond holdings.
Esther L. George, president of the Federal Reserve Bank of Kansas City, suggested during a speech this week that the Fed’s large bond holdings could lower long-term interest rates by as much as 1.5 percentage points. percentage – almost cutting the interest rate on 10-year government debt cut in half. While the balance sheet reduction risks disrupting markets, she warned that if the Fed remains heavily involved in the Treasury market, it could distort financial conditions and jeopardize the central bank’s precious independence from the government. screw the elected government.
What is Inflation? Inflation is a loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in prices of common goods and services such as food, furniture, clothing, transport and toys.
As rates rise, so does the amount the United States owes investors who buy its debt. The Congressional Budget Office estimates that if interest rates rise in line with their own projections, net interest expense will reach 8.6% of gross domestic product in 2051. That would amount to about $60 trillion in interest payments totals over three decades.
“Higher debt makes the U.S. fiscal position more vulnerable to an increase in interest rates,” the CBO said in its long-term fiscal outlook.
In a recent report, Brian Riedl, senior fellow at the Manhattan Institute, a conservative think tank, pointed to the CBO’s prediction that the average interest rate on 10-year Treasury bills would rise from 1.6% to 4 .9% over the next 30 years. . He estimates that if interest rates exceed this forecast by just one percentage point, it will mean an additional $30 trillion in interest charges during this period.
Mr Riedl called policymakers who expected interest rates to stay low indefinitely “arrogant” and said it was risky to assume low rates would keep debt stable over time .
“The economy is unpredictable, and we should never take low interest rates and inflation for granted,” Riedl said in an interview.
Debt interest may soon be the fastest growing part of the federal budget.
Biden administration officials insist they see fiscal responsibility as a priority. They pledged that their economic program would be fully funded by tax increases on wealthy Americans and corporations and tougher enforcement of the tax code. Ms Yellen predicted that inflation will moderate later this year and return to normal levels as supply chains stabilize.
In recent months, the budget deficit has started to narrow as a stronger economy has boosted tax revenues and slowing government pandemic relief payments.
And some economists argue that a more recent economic phenomenon – inflation – may have a positive side in that it could reduce the country’s debt burden.
Kenneth Rogoff, an economist at Harvard University, said rising prices essentially diluted the value of outstanding debt and increased tax revenues as incomes rose. He suggested that markets seemed largely indifferent to the possibility of an interest rate hike so far and that given the other risks to the economy amid the pandemic, the scale of the national debt wasn’t as worrisome as it seemed.
“You’d rather have no debt, of course,” Rogoff said of the $30 trillion total. “But compared to other issues at the moment, this is not the main issue.”