Federal Government Has Spending Problem: Taxes Grow, Spending Soars, & Under 50 To Pay Up

Just last month, U.S. citizens witnessed consensus among Democrats, Republicans, and the Trump Administration as they approved $1.43 trillion in additional fiscal 2020 federal spending. As a result, the Congressional Budget Office (CBO) estimates the federal budget deficit will top $1 trillion for the current fiscal year. Democrats blame the federal deficit on the 2017 tax cuts, while the Republicans attack spending as the culprit. Does the fault lie in too much spending or too little in tax collections?

 

In December 2017, Congress passed and the President signed a major tax cut for businesses and individuals. Since then, the U.S. economy has, as measured by gross domestic product (GDP), expanded by 8.2%, but federal spending advanced by 9.3%, and tax collections actually grew by 3.4% despite the tax cut. Had spending increased at the same rate as tax collections, the current deficit would be $387 billion lower.

 

Since 1966, federal spending has soared at a rate 10 times that of the U.S. economic growth. During this same period of time, federal tax collections grew at 2.5 times that of the U.S. economy. Primarily as a result of this excess in federal spending, the federal debt advanced by 3.4 times that of the overall U.S. economy.  

 

The current U.S. total debt now stands at 106% of GDP, up from 40% in 1966.  

 

Someone must pay the price for this financial gluttony. As Herb Stein, Chairman of the Council of Economic Advisors under Presidents Nixon and Ford once stated, "If something cannot go on forever, it will stop." But when will it stop? As economic bookends, Congressional Representative Alexandria Ocasio-Cortez and former Vice-President Cheney recently stated, "Deficits and debt do not matter."

 

But higher federal debt will ultimately be paid for by those currently under 50 years of age via either plummeting federal spending, soaring higher taxes, higher inflation, or higher interest rates.

 

Before the 2008-09 recession, the federal debt of $20.5 trillion deficit resulted in interest payments of $609 billion, or 6.9%. Due to lower interest rates, current interest payments are only 3.8% on the debt.  

 

Should interest rates rise to pre-recession levels? U.S. taxpayers would have to cough up an additional $706 billion annually. Thus, in this economist's judgment, the debt "house of cards" will come tumbling down when rising inflation pushes interest rates back to their historical average. When will this happen? No mortal economist on this earth knows.  

Ernie Goss