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Whoever becomes U.S. president will need to stop digging deeper into debt

This brutal U.S. election campaign has provided a respite from at least one ugly reality. Both candidates have avoided talking about the hard choices the next president will face getting on top of an elephantine $19-trillion (U.S.) debt load that looms ominously over the global economy.

Republican nominee Donald Trump has blown plenty of smoke about eliminating the debt in just eight years, thanks to his single-handed ability to lift real GDP growth to 6 per cent annually and renegotiate the "disastrous" trade deals sucking the life out of the U.S. economy.

Serious folks ignore such unserious talk. The combination of tax cuts and military spending hikes Mr. Trump promises, all while vowing to leave Social Security and Medicare untouched, would in fact add $5.3-trillion to the debt in 10 years, according to the Center for a Responsible Federal Budget (CRFB), a bipartisan advocacy group that has analyzed both candidates' fiscal platforms.

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Democratic nominee Hillary Clinton vows to increase taxes on the wealthy and corporations to pay for her spending promises, which include subsidies for college tuition and family leave. Her promises would add about $200-billion to the debt over 10 years, the CRFB concludes.

The problem is that, even before considering any additional debt, the U.S. government is already projected to run deficits totalling almost $9-trillion over the next decade, according to the independent Congressional Budget Office. And that figure is based on economic growth of about 2 per cent annually; slower growth or a recession would lead to an even deeper hole.

As it is, the CBO projects that U.S. Treasury debt held by the public (rather than other arms of the U.S. government) will equal 86 per cent of GDP by 2026, compared with 77 per cent now and 52 per cent when President Barack Obama took office.

The last recession produced record deficits, including a jaw-dropping $1.6-trillion shortfall in 2009 – almost 10 per cent of GDP. Markets began to worry about a debt crisis in 2010, leading to protracted negotiations between the Democratic President and Republican-led Congress to secure a "grand bargain" that would increase taxes and cut future spending in roughly equal measure. The failure to reach a deal led Standard & Poor's to withdraw its coveted triple-A credit rating on U.S. Treasury bonds.

When not even that was enough to concentrate minds in Congress, the power brokers in Washington opted for a knife-to-the-throat approach. The White House and Congress agreed to automatic cuts to discretionary spending unless they could come to a better deal. This was supposed to lead to a compromise, since neither party wanted to see its cherished programs slashed indiscriminately.

The compromise never came and the automatic cuts kicked in. This was enough to calm markets for a period, especially as the euro-zone debt crisis made the U.S. problems look manageable in comparison. The White House and Congress simply kicked the can down the road.

The automatic spending cuts, along with a recovering economy and the expiry of recession-era stimulus spending, led to progressively smaller annual deficits. Until this year, that is. The deficit surged 35 per cent to $587-billion in the fiscal year ended Sept. 30, as Congress rolled back some automatic spending cuts. Trillion-dollar-plus deficits are set to resume before long.

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This time, resorting to automatic spending cuts won't be enough. Discretionary spending – which includes defence and infrastructure expenditures – accounts for just 30 per cent of the federal budget. Many economists argue that it has already been cut too much, threatening the country's competitiveness by diverting spending from areas such as education and research.

Besides, the real debt drivers are Social Security (with provides pensions for seniors), Medicare (which covers seniors' health care) and interest costs. This mandatory spending already sucks up 70 per cent of the budget, a proportion that will rise to 77 per cent by 2026. After that, the situation gets truly scary, a fact that markets will begin to fixate on sooner or later.

Only a major overhaul of Social Security and Medicare – involving premium increases, benefit cuts and raising the eligibility age for both programs – is likely to put the U.S. budget on a sustainable footing. Ms. Clinton appeared to recognize this in a private 2013 talk at Wall Street investment firm Morgan Stanley, released by WikiLeaks, in which she praised the reform proposals put forward in 2010 by Mr. Obama's fiscal responsibility commission. But on the campaign trail, Ms. Clinton has rejected benefits cuts or raising the retirement age, both of which were recommended by the commission.

Still, if elected, it would be wise for her to try again for a grand bargain before the markets force her to.

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About the Author

Columnist Konrad Yakabuski writes on politics, policy and business for The Globe and Mail’s Comment section and Report on Business. More


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