The 2018 fiscal year ended Sept. 30 and the U.S. government closed out the year with its largest budget deficit since 2012, according to the most recent Treasury Department report. Uncle Sam ended 2018 $779 billion in the red, adding to the ballooning national debt.
A combination of new federal spending and shrinking revenue due to the Trump tax cuts accounted for the large deficit.
Meanwhile, the national debt expanded by more than $1 trillion in fiscal 2018. According to data released by the Treasury Department, it was the sixth-largest fiscal-year debt increase in the history of the United States.
To make sure we’re clear on terms, the deficit represents the amount of money the government spends each year above and beyond the amount of revenue it brings in. So, if the federal government spend $2 and collects $1 in revenue, it will run a $1 deficit. The debt represents the cumulative amount of all of the deficits. So if the government ran that $1 deficit for five years, it would end up with a $5 debt.
You might be wondering how the debt can grow by a larger number than the annual deficit, economist Mark Brandly explains here.
According to the Treasury Department, the 2018 fiscal deficit was $113 billion (17%) larger than the 2017 deficit. If you adjust for calendar effects (for instance, revenues come in higher during months when quarterly tax filings come due) the gap between fiscal 17 and fiscal 18 came in even larger.
Analysts both inside and outside the government project the deficit will balloon to over $1 trillion annually, perhaps as early as fiscal 2019.
According to Reuters, the Bipartisan Policy Center called the Treasury report a “wakeup call.”
The fact that our government is closing in on trillion-dollar deficits in the midst of an economic expansion should be a serious issue for voters and candidates.”
Although the economy is supposedly in the midst of a boom, U.S. government borrowing under the Trump administration and current GOP Congress looks more like we’re in the midst of a deep recession. Sales of U.S. Treasury Bonds (debt) have risen to levels not seen since the height of the financial crisis.
According to the Treasury report, the rising cost of servicing the existing debt also contributed to the escalating deficit. Interest payments continue to rise as rates go up.
A combination of intentional Federal Reserve monetary tightening, along with normal supply and demand, account for elevating interest rates. Rapidly increasing yields on 10-year Treasury bonds were a major factor in the recent stock market selloff. Earlier this year, the U.S. Treasury Department said it planned to auction off around $1.4 trillion in Treasuries in 2018 alone. And it won’t end there. The department expects that pace of borrowing to continue over the next several years.
Obviously, rising interest rates aren’t good news when you’re trying to finance increasing levels of debt. Growing debt coupled with soaring interest payments creates a vicious upwardly spiraling cycle. As debt grows, it costs more money to service it. That requires more borrowing, which adds to the debt, which increases the interest payments — and on and on it goes.
Interest payments on the national debt already approach $500 billion annually. Every uptick in the interest rate increases that number. At the current trajectory, the cost of paying the annual interest on the U.S. debt will equal the annual cost of Social Security within 30 years.
American consumers face a similar problem in this rising interest rate environment. Total consumer credit rose to a record $3.94 trillion in August, according to the latest numbers from the Federal Reserve.
The Trump administration brushed off the skyrocketing deficit. Office of Management and Budget Director Mick Mulvaney said economic growth spurred by the tax cuts will eventually close the budget gap.
America’s booming economy will create increased government revenues – an important step toward long-term fiscal sustainability.”
But will we actually get the promised growth as the debt continues to swell?
High levels of debt eat away at economic growth. Several studies have estimated that economic growth slows by about 30 percent when the debt to GDP ratio rises to about 90 percent. Most analysts say the U.S. economy is already in the 105 percent debt-to-GDP ratio range. Most economists believe the tax cuts have boosted the economy, but the boost will likely end up short-lived unless Uncle Sam gets his spending problem under control.