Officials at multiple agencies warn that a tipping point is coming and that the situation will only get worse if it snowballs into a crisis. The national debt is now nearly the same size as the entire U.S. economy, about $27.3 trillion, and is expected to double over the next 30 years, according to the Council on Foreign Relations.
Over the past few months, officials from multiple agencies, including the International Monetary Fund, the Congressional Budget Office and banking giant Goldman Sachs Group Inc., have warned that the country’s soaring debt is a big problem — worse than ever, in fact — and some There are concerns that similar market disruptions may occur.
The UK’s economic fiasco under Truss, who announced his resignation after just six weeks as prime minister, came as radical economic proposals for tax cuts and borrowing triggered turmoil in British markets and caused the pound to plummet.
In the United States, International Monetary Fund officials warned that public spending and borrowing would cause the country’s economy to “overheat” while driving up financing costs for the rest of the world. Philip Swagger, director of the Congressional Budget Office, said in an interview with The Hill that the U.S. debt is on an “unprecedented” trajectory. Financial Times, and may face the risk of a Tesla-style economic crisis. Goldman Sachs President and Chief Operating Officer John Waldron expressed similar concerns at the Semafor World Economic Summit on April 18.
Lawrence Gillum, chief fixed income strategist at market insights group LPL Financial, said a truss market collapse in the country “is a potential risk,” especially “if the budget deficit continues to grow.” However, he said a collapse in the UK was not imminent as Treasury auctions – one of the ways the US reduces its debt – were popular.
He explained that most weeks, the U.S. Treasury holds auctions of long-term securities to help offset debt, and typically the buyer base for these securities is diverse, including “domestic buyers like hedge funds and households, as well as foreign buyers.” Countries such as Canada and the United Kingdom have begun buying more Treasuries in recent years. The two largest holders of foreign Treasuries are Japan and China, and while both countries are reducing their exposure to Treasuries, Gillum explained that international Overall demand for Treasuries has not declined.
He said “these auctions are not shocking enough” to suggest an economic collapse similar to what Truss experienced. Instead, the securities being auctioned are larger.
However, he insisted that the growth in the national debt in recent years had been “remarkable”.
“It took the United States about 220 years to issue $11 trillion in national debt, but in the last four years alone we’ve added $11 trillion in debt,” Gillum said. wealthIt added that state deficit spending, or the relationship between state spending and tax revenue, is also “considerable.”
The country’s current deficit spending is $1.06 trillion, according to Treasury Department data for fiscal 2024. While the country has had large budget deficits for quite some time, Gillum explained, “They’re usually not as big as they actually are.” . , no war or recession. ” Gillum said that the current budget deficit “accounts for 6% to 8% of the gross domestic product level, in the absence of a financial crisis, this number is quite large.”
As the country prepares for another election year, it’s worth noting that policies on both sides of politics have increased the national debt in different ways.
Debt will be ‘a big talking point in the election campaign’
“Both parties can no longer be truly fiscally responsible because both parties are increasing the deficit,” Gillum said, citing Trump’s tax cuts and Biden’s spending on the Inflation Reduction Act. In fact, many types of spending contributed to the country’s high debt, and policies were introduced on both sides of politics.
On the one hand, Biden’s Inflation Reduction Act of 2022, a slew of tax laws and green energy tax credits were hailed as major victories against climate change and were intended to reduce the nation’s deficit spending, but have actually increased the deficit. Then there’s former President Trump’s tax bill, enacted in 2017 when Republicans controlled the White House and both chambers of Congress, which slashed the corporate tax rate from 35% to 21% and slashed the tax rate for most family farmers. and estate tax owners of small businesses.
Gillum explained that, simply put, the reason for the country’s high debt is “a widening budget deficit caused by increased spending and reduced taxes.”
The solution is to raise taxes, said Quincy Krosby, global chief strategist at LPL Financial. “Whether you’re a Democrat or a Republican, you can choose to raise taxes,” she said, and doing so is “extremely important because Americans across the country believe billionaires should increase the taxes they pay” so the government can afford things like Projects for Social Security do not deepen its debt.
It turns out that the national debt is indeed a growing concern for Americans. According to the Pew Research Center’s 2023 Survey on Public Policy Priorities, 57% of Americans believe reducing the budget deficit should be a top priority for the president and Congress this year, up from 45% the year before.
According to a report by the Center for American Progress, Trump’s tax cut plan has cost the country about $1.7 trillion by the end of 2023, and the high accumulation of debt is exactly what Gillum believes Trump’s tax cuts will become “during the campaign.” a big topic”. “. Combined with previous tax cuts and the bipartisan extension pushed by former President George W. Bush, the tax cuts have cost $10 trillion and “are responsible for more than 90% of the change in the debt ratio trajectory to date, and this Changes will continue to grow”. They will be responsible for more than 100% of the debt ratio increase in the future. ” the report stated.
Beyond that, the report found, the tax cuts “largely benefited the wealthy, despite also further expanding the child tax credit.” Trump’s tax cuts are expected to expire in 2025, but that could change if Trump wins a second presidential term.
As the economy continues to grow, the costs of rising debt are hidden
Gillum said the national debt is now higher than ever and has soared in the wake of the government’s response to the pandemic, from $22.7 trillion in 2019 to more than $30 trillion in 2022, according to Treasury Department data. this problem.
“Unfortunately, unless there’s a crisis, politicians may not respond,” Gillum said. “That’s one of the things we think is potentially risky,” he added.
Crosby said the biggest contributor to the national debt, coupled with years of growing budget deficits and huge federal spending during the pandemic, is spending on national emergencies, such as major wars and rising health care costs. “Given the complexities of the geopolitical context, all the benefits that most people in the United States expect, especially in health care and Social Security, as well as the country’s increasing defense spending” will lead to an increase in debt. She admits the problem has gotten out of hand.
To be sure, the nation’s high debt and deficit spending help drive the economy by giving individuals more money to buy and invest more, and “the amount of debt hasn’t hindered economic growth yet,” Gillum said. However, high debt does exacerbate “inflation problems,” he added. “It does help economic growth, but it also has an impact on rising prices.”
