How do high and rising federal deficits hurt ordinary Americans?
With the Treasury Department’s recent announcement that the deficit had climbed to $779 billion in the fiscal year that just ended — a 17 percent increase over the previous year — it’s a good time to think about some of the reasons why the public should care about such high government borrowing:
1.) Higher deficits mean more of your tax dollars will be used just to pay interest on the national debt.
The interest cost on the debt is going up at a faster rate than any other part of the federal budget. This results from a combination of more debt and rising interest rates.
The more we pay in interest, the less money will be available for current and future needs — ranging from disaster assistance and medical research to law enforcement and the military. According to Congressional Budget Office (CBO) projections, interest on the debt will exceed defense spending by 2023 and all domestic discretionary spending by 2025.
2.) High federal deficits put upward pressure on interest rates, which if they go too high could slow economic growth, lower salaries, risk recessions, cause job losses and lower U.S. living standards.
When the government borrows money, it is competing for investment dollars that the private sector might put to better use. It has been estimated that projected federal debt increases will reduce family incomes in the coming decades by thousands of dollars a year.
3.) We are passing on an enormous financial burden to younger Americans.
Parents and grandparents often talk about wanting their families to do well. Yet excessive government borrowing means unfairly saddling younger workers, teenagers, children and even future generations with liabilities from the past.
4.) Bigger deficits will make it more difficult to repair Medicare and Social Security.
These two huge programs are critically important to Americans of all ages, but the programs are clearly on unsustainable paths as the U.S. population ages, more people qualify for benefits, and health care costs rise. Fixing these programs will be extremely expensive; Washington should be creating some fiscal space for this work rather than digging itself much deeper into debt.
5.) Large tax increases are likely at some point in the future.
The country’s fiscal difficulties will likely require a combination of spending cuts and tax increases. Many politicians talk as though spending cuts alone are the answer.
They often promise to get rid of waste, fraud and abuse, for example, but it is unrealistic to think that even the most intense efforts in this direction would be sufficient. The larger the fiscal gap, the more severe the changes will be needed to close it.
6.) Rising federal deficits could create instability in the financial markets, making it difficult for average Americans to invest to buy homes, send their children to college and save for retirement.
If federal borrowing continues on its current path — or increases, as many policy options favored by politicians in both major parties would do — confidence in the U.S. government’s fiscal credibility could at some point falter, leading investors to demand much higher interest rates.
This could produce some ugly financial surprises for millions of ordinary Americans.
7.) High deficits could make it more difficult for Washington to deal with unanticipated emergencies that could affect virtually all Americans.
These emergencies could range, for example, from military or environmental crises to another “Great Recession” that requires massive government spending to prevent an economic meltdown.
If Washington is already deep in debt and borrowing heavily, it will be far more difficult to find the political will necessary to deal with future emergencies. Even now, Washington repeatedly struggles with disaster assistance funding.
Earlier this month Federal Reserve Chairman Jerome H. Powell agreed with many economists who worry that Washington’s heavy borrowing could make it more difficult to counteract the next economic downturn.
Given all of the problems and risks of higher federal deficits, it is troubling that government projections show them continuing to rise rapidly in the years ahead. The CBO projects that under current law annual deficits could start topping $1 trillion by the next fiscal year.
The CBO’s long-term projections, released a few months ago, are even grimmer.
To make matters worse, elected officials and other congressional candidates this year have proposed various measures that would boost deficits even further to finance additional tax cuts or new spending.
The currently strong economy would be a good time for Washington to start lowering deficits, fixing the entitlement programs and trying to do a better job on tax reform. The government should also pursue policies to support stronger long-term economic growth, not the short-term measures about which so many politicians are now boasting.
The longer we wait to pursue serious fiscal reforms, the more difficult the job will be. Simply borrowing more and more money in the years ahead would be the height of irresponsibility.