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The National Debt Dilemma

The national debt of the United States has resurfaced as a source of concern. Emergency spending in response to the COVID-19 pandemic has brought the US debt to heights not seen since World War II, nearly $17 trillion in 2019—making debt reduction much more difficult. President Donald Trump's major budget legislation, along with sustained growth in benefits and increased interest rates, put the debt on course to roughly double by 2029, approaching the size of the whole US economy. By mid-century, the debt is predicted to be double the size of the GDP due to pandemic-related spending. President Joe Biden has promised to invest trillions of dollars more to transform the economy in the aftermath of the pandemic. According to some economists, the rising debt might expose the country to a multitude of problems. The solution of rising debt will require decisions of cutting entitlement expenditure, boosting taxes, or doing both, which are politically difficult. Other experts argue that the US can afford to borrow more because of its unique position in the global economy, which allows it to pay comparatively low interest rates.


How did the debt get to its current level?


Let us first define the difference between a deficit and a debt for better comprehension. The amount by which spending exceeds revenue for a specific time period, usually a year, is referred to as deficit spending. The total amount owed by the government is referred to as debt. Since the country's founding, the United States has had yearly deficits almost every year. The time following World War II, when the United States ascended to worldwide superpower status, is an excellent place to start when looking at current debt levels. Defence spending throughout the war resulted in record borrowing, with the national debt reaching more than 100 percent of GDP in 1946. Despite conflicts in Korea and Vietnam, and the development of Medicare and Medicaid, continuous economic growth over the next thirty years progressively lowered the debt as a percentage of the economy. Overall, debt as a proportion of GDP reached a low point of 24 percent in 1974. Beginning in the 1980s, soaring defence spending and broad tax cuts ushered in a new era of debt accumulation. During the 1990s, a combination of tax hikes, defence cuts, and an economic boom lowered debt as a percentage of GDP, resulting in four years of budget surpluses, the first in forty years, beginning in 1998. Deficits resurfaced under President George W. Bush, who presided over a period of tax cuts, war expenditures in Afghanistan and Iraq, and large new benefits such as Medicare Part D. President Barack Obama, in response to the Great Recession, extended Bush administration's bank rescue programme and gave hundreds of billions of dollars in fiscal stimulus, resulting in annual deficits of more than $1 trillion.

The federal government has spent trillions of dollars to stimulate the economy in response to the COVID-19 pandemic, including stimulus payments for citizens and aid to businesses and state and municipal governments. These policies, according to the Congressional Budget Office (CBO), will increase the government deficit to $3.1 trillion in 2020 or roughly 15% of GDP, the highest level since World War II. Even before the pandemic, the CBO projected that by 2020, the yearly deficit would have surpassed $1 trillion and would be there permanently. In 2019, the public debt (the amount the government owes to private investors) totalled $16.9 trillion. That was nearly double the amount in 2007, rising to over 80% of GDP from 35% in 2007. Intragovernmental debt, or debt owed by one U.S. government agency to another, was more than $22.9 trillion in 2019, accounting for more than 120 percent of GDP. Before factoring in COVID-19 spending, public debt of the United States was expected to nearly double to more than $29 trillion over the next decade. It is currently around $22 trillion, and by 2051, it is expected to be double the size of the economy.


How does the US debt stack up against that of other countries?

Debt-to-GDP ratio of the United States is among the highest in the developed world. Only Japan is ahead of the US among industrialised nations. According to the International Monetary Fund, the pandemic has caused a dramatic surge in borrowing around the globe. Debt as a percentage of GDP in industrialised economies has risen from roughly 75% to nearly 95%, owing to double-digit rises in debt in the US, Canada, France, Italy, Japan, Spain, and the United Kingdom (UK). The US has long held the title of world's largest economy, with no history of debt default. Furthermore, it has served as the world's reserve currency since the 1940s. As a result, the US dollar is regarded as the world's most desirable currency. The dollar's high demand has aided the US in financing its debt, since many investors prefer to hold low-risk, dollar-denominated assets like US Treasury bills, notes, and bonds. One element that has allowed the US to borrow money at low interest rates is steady demand from foreign creditors—primarily central banks adding to their dollar reserves rather than market investors. In comparison to other countries, this puts the US in a stronger position to resist COVID-19 fiscally. This solidifies the claim of experts that the US can afford to borrow more because of its unique position in the global economy, which permits it to pay low interest rates.


How much does rising U.S. debt matter?

Some analysts claim that the United States can comfortably maintain high levels of debt, while others warn that the country will have to eventually pay the price. There are a variety of opposing viewpoints that must be adequately analysed in order to arrive at an unbiased judgement of the US economy.

Some experts argue that repaying the debt would shift investment away from critical sectors such as infrastructure, education, and climate change mitigation. There are also concerns that it will weaken US global leadership by reducing funding for military, diplomatic, and humanitarian missions around the world. Some economists and Biden administration officials contend that these fears are exaggerated, and that Washington still has decades to address the issue. They point out that the cost of financing the debt has been relatively low in terms of interest payments as a percentage of GDP over the last two decades, but it will rise over time. Experts have also suggested that the US should use the current low borrowing rates to invest in infrastructure, climate efforts, and the social safety net as they believe that if a problem emerges, the US can afford to print money.

A healthy fiscal outlook (according to another viewpoint), is a necessary basis for a prosperous economy. Putting the country on a budgetary path that is sustainable produces a favourable atmosphere for growth, opportunity, and security. Increased access to finance, more resources for future public and private investments, improved consumer and company confidence, and a stronger safety net are all benefits of a strong fiscal foundation. If this fails, however, the opposite is also true. If long-term fiscal difficulties are not addressed, the economy will deteriorate as access to capital is limited, interest costs crowd out essential investments in our future and growth prospects decline. As a result, the country is more exposed to economic disaster. If the long-term fiscal imbalance is not resolved, future economic prospects for people will be limited, and there will be less fiscal flexibility to respond to future crises.


Experts predict the US will be in a ‘debt trap’, with high debt stifling growth, which in turn leads to greater debt. They are concerned that big debts may limit growth or trigger a fiscal crisis, saying that there is a tipping point beyond which large amounts of government debt will reduce growth. Investors may lose faith in Washington's capacity to right the fiscal ship in this scenario and be hesitant to finance US borrowing without significantly higher interest rates. This could lead to even bigger deficits and further borrowings, a situation known as a debt spiral. A fiscal crisis of this magnitude may entail drastic and economically damaging budget cuts or tax hikes.


Furthermore, excessive debt levels will have a significant impact on many other elements of the economy in future. Higher interest rates, for example, as a result of increasing federal borrowing, would make it more difficult for families to purchase homes, finance vehicle payments, or pay tuition. Additionally chances of the government defaulting on its debt service obligations rise as national debt per capita rises. Because more tax-payer money will have to be paid out as interest on the national debt, the amount of tax revenue available to spend on other governmental services will be reduced. As borrowing for economic improvement projects becomes more difficult, people will experience a reduced standard of living as a result of this shift in spending. Fewer education and training opportunities stemming from lower investment would leave workers without the skills to keep up with the demands of an increasingly technology-based, global economy. Slower economic growth in general would worsen the budgetary problems, as lower earnings result in reduced tax receipts, further destabilising the government budget. Budget cuts would put even more strain on vital safety net programmes, jeopardising help for those who need it the most. Most crucially, when the risk of a country defaulting on its debt service obligations rises, the country's social, economic, and political authority diminishes.


Conclusion

One of the most critical public policy challenges is the national debt level. Debt can be utilised to promote a country's long-term growth and prosperity when used properly. The national debt, on the other hand, must be assessed properly, either by comparing the amount of interest expenditure paid to other governmental expenses or by comparing debt levels per capita. As both propositions are backed by certain facts and figures, the dilemma of whether debt should continue to rise (by maintaining investment in critical sectors such as infrastructure, education, and climate change mitigation) or should be avoided (by cutting spending and raising revenues) requires a thorough examination and analysis by various policy experts and economists.


Sources:

What the National Debt Means to You. (2020, October 2). Investopedia. https://www.investopedia.com/articles/economics/10/national-debt.asp McBride, J. (2021, October 1). The National Debt Dilemma. Council on Foreign Relations. https://www.cfr.org/backgrounder/national-debt-dilemma

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