How America’s debt can’t end its growth
Public sector debt is a subject of debate for years. Although some people believe that the excessive borrowing of government can be detrimental in the long haul but others argue that it can be an effective tool to stimulate growth.
Within the U.S., the latter viewpoint has taken hold. Since 2008, the nation’s debt has increased by more than 200%, and reached $27 trillion in October, 2020. To get a better grasp of the ever-growing amount of debt, the infographic provides an in-depth look at various U.S. budgetary datasets including the 2019 balance of the budget.
America’s debt vs. GDP
The government’s debts are usually expressed in huge amounts, which makes them difficult to understand. Comparing America’s debt to its GDP per year to get an understanding of the magnitude of the nation’s financial obligations.
In this sense, U.S. debt was fairly moderate from 1994 to 2007 and was averaging 60 percent of GDP in the span of. The situation changed dramatically in the Global Financial Crisis, with the amount of debt reaching 95percent of GDP in the year 2012.
Since then, the debt of America has only increased in size. In April of 2020, with the COVID-19 epidemic in full swing the debt reached a record 122 percent of GDP. It may seem alarming initially however, there are some warnings.
In addition, there are numerous other modern economies that have also reached the goal of 100% debt-to-GDP. Most notable is Japan where the debt-to GDP ratio has increased to 200 percent. In addition, this isn’t an unusual situation. America has been in this predicament. By the end the second half of World War II, debt-to-GDP was at a peak of 106%, before dropping to record lows in the 1970s.
What’s keeping the amount of debt from shrinking?
While there is a tendency for the U.S. continuously pays off parts of its debts but the amount owed has increased every calendar year from 2001. The reason is that the federal government is running consistent budget deficits. This means that the government spends much more money than it earned. When economic turmoil hits they can grow enormous.
Following the Global Financial Crisis, the U.S. recorded an annual deficit of $1.4 trillion in FY2009. This was mostly thanks to $787 billion American Recovery and Reinvestment Act of 2009 which offered tax rebates as well as other relief for the economy.
In the battle for economic survival against COVID-19’s effects The boundaries have been stretched even more. The deficit for FY2020 is an astonishing $3.1 trillion, the biggest ever. What contributed to this historic budget deficit is the $2.5 trillion CARES Act which offered broad-ranging assistance to the U.S. economy.
Breaking Down the 2019 Fiscal Balance
In the years between the two crisis, spending by the government outpaced revenue. To learn more we’ve broken down the budget deficit for the year of 2019 into its different components.
Federal spending
The total amount spent in FY2019 was around $4.4 trillion. This figure can be broken down into three elements.
The first one is Mandatory Spending which made up 62 percent in total. Mandatory spending is a requirement of law and is a source of funds for vital programs like social security.
The biggest category of all was Health which had $1.1 trillion of funding available for programs like Medicare as well as Medicaid. Social securityinsurance, that pays retirement benefits was second in importance with $1.0 trillion.
The second part is discretionary Spending that accounted for 30 percent in total. The amount of discretionary spending is set annually through Congress as well as the president.
At $677 billion The Defense category is more than half of the total discretionary expenditure. These funds are distributed among 5 branches in the U.S. military: the Army, Marine Corps, Navy, Air Force, and Space Force.
The third element in spending represents the net interest cost for existing debts of the government. In FY2019, it was around $327 billion.
Federal revenues
Revenues for FY2019 did not match the total expenditure totaling around $3.5 trillion. The inflows can be traced to six areas.
The bulk of the revenue was derived from personal income taxes and payroll taxes that together made up 86% of total. Corporate tax on income, on the other hand, were responsible for only 7 percent.
Do you think America’s debt is cause for concern?
The consensus that has emerged from the 2008 events is that the large-scale government stimulus (supported by borrowing from the government) helped speed up the recovery that followed.
In the midst of a global epidemic, it’s likely that a lot of Americans will be in favor of running huge deficits to stimulate the economy. In July 2020, surveys released such as the one above, showed that 82 percent of Americans were in favor of for federal aid measures to continue.
The look beyond COVID-19 however there are certain warning indicators. A common criticism of the growing national debt is the charges for interest that could reduce investment across other sectors. The effects of this issue are beginning to be seen. In the last decade over the past decade, the U.S. has spent more on interest than spent on programs like educational benefits for veterans and other benefits.
Since there are extremely low yields anticipated for the near future The federal government will likely continue to run its massive annual deficits, at least until the COVID-19 effects have subsided completely. After the current crisis is over then it’s time to evaluate the long-term viability of the nation’s growing debt.
