It looked like a rare moment to celebrate in Washington last month, when Democrats and Republicans in Congress managed to reach a deal on the federal budget without the usual brinksmanship. Indeed, the entire episode was so collegial it barely made the news.
Yet, the budget deal that passed Congress at President Donald Trump’s urging has put the U.S. deficit on a dangerous trajectory, one that could come back to bite us all if rising fears about an economic downturn are realized. A U.S. debt crisis could be only a recession away.
The budget deal struck by congressional leaders and the White House largely passed under the radar. Amid Mr. Trump’s unique baiting of his adversaries and the media with outrageous tweets, a difficult conversation about the federal budget doesn’t stand a chance in today’s Washington. Nor are the Democrats vying for their party’s 2020 presidential nomination about to let fiscal reality interfere with their fantasy promises of Medicare-for-all and free tuition.
That the media in the United States and elsewhere devoted more attention this week to a fake controversy about the future ownership of Greenland than the latest deficit projections from the U.S. Congressional Budget Office tells you all you need to know about the state of denial.
As a presidential candidate, Mr. Trump railed against the fiscal indiscipline of his predecessors and vowed he could eliminate the federal debt, which then stood at US$19-trillion, within eight years. Of course, nobody believed him then. As a real estate developer, Mr. Trump had racked up gargantuan debts, defaulted on multiple loans and filed for bankruptcy six times.
Still, Mr. Trump has made a bigger mess of federal finances than even his critics feared. The U.S. debt has increased by more than US$2-trillion since he became President. And because of the budget deal he just signed, it is on track to surpass US$30-trillion within a decade.
Just taking into account what’s known as the federal debt held by the public, and excluding U.S. Treasury bonds owned by other branches of the government, the increase appears even more staggering. According to Wednesday’s CBO report, federal debt held by the public will rise from US$16.7-trillion at the end of 2019 fiscal year on Sept. 30 to US$29.3-trillion in 2029.
As a percentage of gross domestic product, federal debt held by the public will rise from 79 per cent this year to 95 per cent by 2029, “its highest level since just after World War II,” the CBO notes.
In the 2019 fiscal year alone, the CBO said, the U.S. federal deficit is set to rise 25 per cent from last year to US$960-billion, or 4.5 per cent of GDP. By contrast, Ottawa’s budget deficit is projected to equal 0.9 per cent of GDP in the fiscal year ending next March.
The U.S. deficit hit a record US$1.4-trillion in 2009, or 9.9 per cent of GDP, during former president Barack Obama’s first year in office. But Mr. Obama inherited the worst economy since the Great Depression and presided over bailouts of the banking and auto industries that were initiated under George W. Bush. He also got Congress to pass a massive stimulus plan.
Spending caps adopted in 2011, and a recovering economy, brought the deficit down to US$438-billion in 2015. Congress had already abandoned many measures aimed at fiscal restraint by the time of the 2016 election. But under Mr. Trump, it has given up entirely on reining in spending on Medicare, Medicaid and Social Security – which is projected to double by 2029 – even though everyone knows that a reckoning is inevitable.
Mr. Trump did not invent the fiscal time bomb created by those programs. But he has made matters far worse by cutting taxes, eliminating spending caps and boosting the defence budget. On Tuesday, he even mused about passing additional tax cuts this year, before retreating on that idea on Wednesday. He is clearly clueless about how the economy works.
Mr. Trump is obviously terrified about a recession hitting before U.S. voters go to the polls in late 2020. But if a recession hits, he will bear a great deal of the blame. The trade war he unleashed with China has seriously undermined U.S. consumer and business confidence. As evidence of his backward economic thinking, Mr. Trump sees tariffs on Chinese goods as a source of revenue for the U.S. Treasury rather than a tax on U.S. households.
The current U.S. expansion is already the longest on record and would be due for a pause, regardless. But Mr. Trump has tipped the scales – and not in a good way – with the most irresponsible trade and fiscal policies since the Great Depression.
And we just spent the week talking about Greenland?