Even the Fed Thinks Current Debt Levels Are Unsustainable
A few months ago US national debt exceeded $28 trillion. This number is certainly the one economists usually work with, but does this figure capture a long-term perspective?
In March 2021, the Department of the Treasury published the 2020 Financial Report of the United States Government. In the initial message, Secretary Janet L. Yellen writes: “This Financial Report discusses not only current financial results but also important, long-term trends affecting our critical social insurance programs and fiscal health.” The report not only discloses the current debt level, but also projects the cost of the government’s future obligations to its citizens. It notes that citizens will have the right to demand benefits from the state in the future.
The United States is one of the few countries whose treasury, in an act of transparency and with rigorous analysis, has warned its government of the unsustainability of the country’s public finances.
The US Department of the Treasury anticipates that unless there are substantial changes, the system will not be sustainable: “If changes in policy are not so abrupt as to slow economic growth, then the sooner policy changes are adopted, the smaller the changes to revenue and/or spending [that] will be required to return the government to a sustainable fiscal path.”
Government reports on macroeconomic matters tend to be ambivalent. Nevertheless, this one’s conclusion is decisive: the US government’s fiscal policy is unsustainable.
The Primary Deficit
The report usefully distinguishes between the primary deficit and the total deficit. Generally speaking, the primary deficit does not include the cost of servicing the debt (i.e., interest) while the total deficit does.
To conduct a rigorous analysis of public finance sustainability, it is appropriate to consider the primary deficit, because if there is a structural primary deficit, it is difficult for a country to achieve long-term sustainability no matter the interest rate. The Fed could help the government lower the total deficit with a rate decrease, but major structural changes are needed to lower the primary deficit.
The following graph, which appears in the report, compares total fiscal receipts, represented by the black line, with total structural expenditure. When the line representing total receipts (the thick black line) is below the sum of the various budget expenditure items, there is a primary deficit. During the years of the financial crisis (2009–12), the deficit-to-GDP ratio spiked, and it skyrocketed again in 2020 due to increased spending to address covid-19.
Chart 1: Comparison of Each Major Category’s Weight with Respect to Tax Revenues
Source: US Department of the Treasury, Financial Report of the United States Government, FY 2020, Mar. 25, 2021.
The Department of the Treasury assumes there will be a structural primary deficit and that total deficit (represented by the difference between the blue line and the thick black line), which includes the cost of servicing the debt, will increase with time.
The report continues with a graph that illustrates how, if the trend continues, the government’s debt could reach 300 percent of GDP in less than forty years.
It is important to clarify that the above graph only considers “debt held by the public,” currently around 100 percent of GDP; however, if debt held by Federal Reserve Banks were incl
Article from Mises Wire